6 Measuring the Cost of Living

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

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Measuring the Cost of Living Measuring the Cost of Living Inflation refers to a situation in which the economy’s overall price level is rising. The inflation rate is the percentage change in the price level from the previous period. THE CONSUMER PRICE INDEX The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The Bureau of Labor Statistics reports the CPI each month. It is used to monitor changes in the cost of living over time. When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living. 1. The CPI is a measure of the overall cost of a. inputs purchased by a typical producer. b. goods and services bought by a typical consumer. c. goods and services produced in the economy. d. stocks on the New York Stock Exchange. How the Consumer Price Index Is Calculated 1. Fix the basket. Determine what prices are most important to the typical consumer. The Bureau of Labor Statistics (BLS) identifies a market basket of goods and services the typical consumer buys. The BLS conducts monthly consumer surveys to set the weights for the prices of those goods and services. 2. Find the prices. Find the prices of each of the goods and services in the basket for each point in time. 3. Compute the basket’s cost. Use the data on prices to calculate the cost of the basket of goods and services at different times. 4. Choose a base year and compute the index. Designate one year as the base year, making it the benchmark against which other years are compared. Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100. 5. Compute the inflation rate. The inflation rate is the percentage change in the price index from the preceding period. 1 100 year base in basket of Price services and goods of basket of Price index price Consumer × = CPI in Year 2 CPI in Year 1 Inflation Rate in Year 2= 100 CPI in Year 1 -

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Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example 2. Refer to Table 11-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, the CPI for 2006 is ________. 3. Refer to Table 11-1. Suppose the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans. Using 2005 as the base year, what was the inflation rate in 2006?
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## This note was uploaded on 07/22/2009 for the course ECON 203 taught by Professor Nelson during the Fall '08 term at Texas A&M.

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6 Measuring the Cost of Living - Measuring the Cost of...

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