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Principles of Economics- Mankiw (5th) 498

Principles of Economics- Mankiw (5th) 498 - 514 PA R T E I...

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514 PART EIGHT THE DATA OF MACROECONOMICS services in each year is divided by the price of the basket in the base year, and this ratio is then multiplied by 100. The resulting number is the consumer price index. In the example in the table, the year 2001 is the base year. In this year, the basket of hot dogs and hamburgers costs $8. Therefore, the price of the basket in all years is divided by $8 and multiplied by 100. The consumer price index is 100 in 2001. (The index is always 100 in the base year.) The consumer price index is 175 in 2002. This means that the price of the basket in 2002 is 175 percent of its price in the base year. Put differently, a basket of goods that costs $100 in the base year costs $175 in 2002. Similarly, the consumer price index is 250 in 2003, indicating that the price level in 2003 is 250 percent of the price level in the base year. 5. Compute the Inflation Rate. The fifth and final step is to use the consumer price index to calculate the inflation rate, which is the percentage change in the
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