Cobbe ECO2013 Fall 03 Chapter 7Page 1 of 12<When you have completed your study of this chapter, you will be able toC H A P T E R C H E C K L I S TExplain what the Consumer Price Index (CPI) is and how it is calculated.1Explain 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.237.1 THE CONSUMER PRICE INDEXConsumer 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 7Page 2 of 127.1 THE CONSUMER PRICE INDEX<Reading the CPI NumbersThe CPI is definedto equal 100 for a period called the reference base period.Reference base periodA period for which the CPI is defined to equal 100. Currently, the reference base period is 1982-1984.7.1 THE CONSUMER PRICE INDEXIn 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 CPIThree stages:•Selecting the CPI basket•Conducting the monthly price survey•Calculating the CPI<The Monthly Price SurveyEach month, BLS employees check the prices of the 80,000 goods and services in the CPI basket in 30 metropolitan areas.