Measuring the Econom1

Measuring the Econom1 - example the percent change in the...

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Measuring the Economy Consumer Price Index (CPI) The consumer price index or CPI is a more direct measure than per capita GDP of the standard of living in a country. It is based on the overall cost of a fixed basket of goods and services bought by a typical consumer, relative to price of the same basket in some base year. By including a broad range of thousands of goods and services with the fixed basket, the CPI can obtain an accurate estimate of the cost of living. It is important to remember that the CPI is not a dollar value like GDP, but instead an index number or a percentage change from the base year. Changes in the CPI over time As we have just seen, the CPI changes over time as the prices associated with the items in the fixed basket of goods change. In the example just explored, the CPI of Country B increased from 100 to 141 to 182 from time period 1 to time period 3. The percent change in the price level from the base year to the comparison year is calculated by subtracting 100 from the CPI. In this
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Unformatted text preview: example, the percent change in the price level from the base period (time period 1) to time period 2 is 141 - 100 = 41%. The percent change in the price level from time period 1 to time period 3 is 182 - 100 = 82%. In this way, changes in the cost of living can be calculated across time. Introduction of New Items The second problem with the CPI is the introduction of new items. As time goes on, new items enter into the basket of goods and services purchased by the typical consumer. For example, if in time period 4 consumers in Country B began to purchase books, this would need to be included in an accurate estimate of the cost of living. But since the CPI uses only a fixed basket of goods, the introduction of a new product cannot be reflected. Instead, the new items, books, are left out of the calculation in order to keep time period 4 comparable with the earlier time periods....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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