# Ch07 - CHAPTER CHECKLIST When you have completed your study...

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When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Explain what the Consumer Price Index (CPI) is and how it is calculated. 1 Explain the limitations of the CPI as a measure of the cost of living. Adjust money values for inflation and calculate real wage rates and real interest rates. 2 3
7.1 THE CONSUMER PRICE INDEX Consumer Price Index (CPI) A measure of the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services. The ‘basket’ is based on an expenditure survey, and is what on average consumers bought back in 1982-84.

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7.1 THE CONSUMER PRICE INDEX Reading the CPI Numbers The CPI is defined to equal 100 for a period called the reference base period. Reference base period A period for which the CPI is defined to equal 100. Currently, the reference base period is 1982-1984.
7.1 THE CONSUMER PRICE INDEX In July 2003, the CPI was 183.9. That means, the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services was 83.9 percent higher in July 2003 than it was on average during 1982-1984.

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7.1 THE CONSUMER PRICE INDEX Constructing the CPI Three stages: Selecting the CPI basket Conducting the monthly price survey Calculating the CPI The Monthly Price Survey Each month, BLS employees check the prices of the 80,000 goods and services in the CPI basket in 30 metropolitan areas.
7.1 THE CONSUMER PRICE INDEX The CPI Basket Make the relative importance of the items in the CPI basket the same as in the budget of an average urban household. CPI-U Measures the average price paid by all urban households. CPI-W Measures the average price paid by urban wage earners and clerical workers.

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7.1 THE CONSUMER PRICE INDEX Figure 7.1 shows the CPI basket. This shopping cart is filled with the items households buy on average .

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7.1 THE CONSUMER PRICE INDEX 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 current period [by definition, it is 100 for the base period].
7.1 THE CONSUMER PRICE INDEX Table 7.1 shows the consumer price index: a simplified CPI calculation.

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7.1 THE CONSUMER PRICE INDEX 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
7.1 THE CONSUMER PRICE INDEX

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## This note was uploaded on 05/22/2011 for the course ECO 2013 taught by Professor Denslow during the Spring '05 term at University of Florida.

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Ch07 - CHAPTER CHECKLIST When you have completed your study...

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