Measuring the Cost of Living

# Measuring the Cost of Living - Macroeconomics Measuring the...

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Macroeconomics Measuring the Cost of Living Consumer Price Index (CPI): A measure of the overall cost of the GLS bought by a typical consumer How CPI is calculated: 1) Fix the basket 2) Find the prices 3) Compute the cost of the basket 4) Choose a base year and compute index 5) Compute the inflation rate (Pie) Step 1: Fix the basket to 10 pounds of coffee and 5 red bulls Step 2: Find prices (on the chart) Step 3: 2000: \$2 * 10 + \$1 * 5 = \$ 25 2001: \$2.50 * 10 + \$1 * 5 = \$30 2002: \$3.00 * 10 + \$2 * 5 = \$40 Step 4: 2000: (25/25) * 100 = 100 2001: (30/25) * 100 = 120 2002: (40/25) * 100 = 160 CPI: (cost of basket T/ cost of basket B) * 100 Percentage change: (new value – old value/ old value) * 100 Inflation: the percentage change in the price index form the preceding period: The percentage change CPI = 160-120/120 = 40/120 = 1/3 = 33.33% (inflation rate) Producer Price Index: PPI: A measure of the cost of a basket of goods and services bought by firms - Since firms pass on costs to consumers, PPI is thought to be useful statistic in predicting

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Measuring the Cost of Living - Macroeconomics Measuring the...

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