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Ch073 - CHAPTER CHECKLIST

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Cobbe ECO2013 Fall 03 Chapter 7 Page 1 of 12 < 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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Cobbe ECO2013 Fall 03 Chapter 7 Page 2 of 12 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. 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.