Calculation of inflation rate Consider the impact of inflation in a two person economy: Bob is a soybean farmer and Rita is a rice farmer. They always consume the same amount of rice and soybeans. In 2008, soybeans cost $1 and rice $3 Suppose the price of soybeans is $2 and the price of rice is $4 in 2009. What is the inflation rate? Suppose the price of soybean is $2 and the price of rice is $1.50 in 2009. What is the inflation rate?

Calculation of inflation rate Consider the impact of inflation in a two person economy: Bob is a soybean farmer and Rita is a rice farmer. They always consume the same amount of rice and soybeans. In 2008, soybeans cost $1 and rice $3 Suppose the price of soybeans is $2 and the price of rice is $4 in 2009. What is the inflation rate? Suppose the price of soybean is $2 and the price of rice is $1.50 in 2009. What is the inflation rate?

Suppose 1: Rice (4-3) × 3 × 100% = 33.3% soybean (2-1) × 1 × 100% = 100%
Hypothesis 2: Rice (1.5-3) × 3 × 100% = - 50% (rice deflation) soybean (2-1) × 1 × 100% = 100%
Inflation rate = (current price level - base price level) / base price level