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Consumer Price Index
The simplest and widely used measure of inflation is the Consumer Price Index (CPI). To
compute the price index, the cost of the market basket in any period is divided by the cost of the
market basket in the base period, and the result is multiplied by 100.
If you want to forecast the economic future, you can do so without knowing anything about how
the economy works. Further, your forecasts may turn out to be as good as those of professional
economists. The key to your success will be the Leading Indicators, an index of items that
generally swing up or down before the economy as a whole does.
Period 1
Period 2
Items
q1 =
Quantity
p1 =
Price
q1 =
Quantity
p1 =
Price
Apples
10
$.20
8
$.25
Oranges
9
$.25
11
$.21
we found that using period 1 quantity, the price index in period 2 is
($4.39/$4.25) x 100 = 103.29
Using period 2 quantities, the price index in period 2 is
($4.31/$4.35) x 100 = 99.08
A better price index could be found by taking the geometric mean of the two. To find the
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This note was uploaded on 10/06/2011 for the course ECO 6416 taught by Professor Staff during the Spring '08 term at University of Central Florida.
 Spring '08
 Staff
 Consumer Price Index (CPI), Inflation

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