Concept:A price index measures the average change in prices of a fixed basket of goods; inflation rate is the percentage change in the index from one year to the next.
Explanation:Statement 1 is correct because a price index, such as the Consumer Price Index (CPI), captures the change in the average price of a constant basket of commodities over time.
This is a standard economic definition and is the basis for measuring inflation.
For statement 2: Given price index values are 100 in year 1, 110 in year 2, and 121 in year 3.
Inflation rate for year 2 is
100110−100​×100=10%.
Inflation rate for year 3 is
110121−110​×100=10%, not
21% as stated in the statement.
The error is that the inflation rate is calculated as the percentage change from the previous year, not from the base year.
Therefore, statement 2 is incorrect.
Only statement 1 is correct.
Answer:A. 1 only