## How the Rate of Inflation is Calculated

Suppose people only spend on three things: food, cars and houses.

They spend

\[\frac{1}{6}\]

of their income on good.They spend

\[\frac{1}{3}\]

of their income on cars.They spend

\[\frac{1}{2}\]

of their income on houses.Food prices increase by 10%.

Food prices increase by 20%.

Food prices increase by 30%.

The overall increase in the price level is

\[10 \times \frac{1}{6}+20 \times \frac{1}{3}+30 \times \frac{1}{2}=23.3 \%\]

.