512 PART EIGHT THE DATA OF MACROECONOMICS In the preceding chapter we looked at how economists use gross domestic product (GDP) to measure the quantity of goods and services that the economy is producing. This chapter examines how economists measure the overall cost of liv-ing. To compare Babe Ruth’s salary of $80,000 to salaries from today, we need to find some way of turning dollar figures into meaningful measures of purchasing power. That is exactly the job of a statistic called the consumer price index. After see-ing how the consumer price index is constructed, we discuss how we can use such a price index to compare dollar figures from different points in time. The consumer price index is used to monitor changes in the cost of living over time. When the consumer price index rises, the typical family has to spend more dollars to maintain the same standard of living. Economists use the term inflation to describe a situation in which the economy’s overall price level is rising. The
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