Meeting _15 - Inflation Part 2

# Meeting_15- - INFLATION PART 2 Constructing the CPI Three stages Selecting the CPI basket Conducting the monthly price survey Calculating the CPI

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INFLATION PART 2 INFLATION PART 2

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Constructing the CPI Constructing the CPI Three stages: Selecting the CPI basket Conducting the monthly price survey Calculating the CPI
Selecting the CPI Market Basket Selecting the CPI Market Basket Make the relative importance of the items in the CPI basket the same as in the budget of an average urban household. The CPI is calculated each month, but the CPI basket is not updated each month. The current CPI basket is based on information obtained from the Consumer Expenditure Survey conducted during 2001 and 2002.

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CPI Weights CPI Weights
Conducting the Monthly Price Conducting the Monthly Price Survey Survey Because the CPI measures price changes, it is important that the prices recorded refer to exactly the same items Each month, BLS employees check the prices of the 80,000 goods and services in the CPI basket in 30 metropolitan areas.

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Calculating the CPI Calculating the CPI The CPI calculation has three steps: Find the cost of the CPI basket at base period prices. Find the cost of the CPI basket at current period prices. Calculate the CPI for the base period and the current period.
Calculating the CPI Calculating the CPI

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Calculating the CPI Calculating the CPI CPI = Cost of CPI basket at current period prices Cost of CPI basket at base period prices x 100 For 2000, the CPI is: = 100 \$50 \$50 x 100 For 2003, the CPI is: = 140 \$70 \$50 x 100
Use the CPI to Measure Inflation Use the CPI to Measure Inflation The percentage change in the price level from one year to the next. Inflation rate = = 16.7 percent 140 - 120 120 x 100 CPI in current year - CPI in previous year CPI in previous year x 100 Inflation rate =

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Flaws in Measuring the CPI Sources of Bias in the CPI The potential sources of bias in the CPI are
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## This note was uploaded on 04/14/2008 for the course ECON 101 taught by Professor Thompson during the Spring '06 term at Mines.

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Meeting_15- - INFLATION PART 2 Constructing the CPI Three stages Selecting the CPI basket Conducting the monthly price survey Calculating the CPI

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