Cobbe ECO2013 Fall 03 Chapter 7
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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 198284.
7.1 THE CONSUMER PRICE INDEX
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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 19821984.
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 19821984.
7.1 THE CONSUMER PRICE INDEX
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Constructing the CPI
Three stages:
•
Selecting the CPI basket
•
Conducting the monthly price survey
•
Calculating the CPI
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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.
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7.1 THE CONSUMER PRICE INDEX
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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.
CPIU
•
Measures the average price paid by all urban
households.
CPIW
•
Measures the average price paid by urban wage
earners and clerical workers.
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
.
7.1 THE CONSUMER PRICE INDEX
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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.
7.1 THE CONSUMER PRICE INDEX
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 Spring '05
 Denslow
 Consumer Price Index (CPI), Inflation, Consumer price index

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