Copyright ? 2004 South-Western 24 24 Measuring the Cost of Living Copyright ? 2004 South-Western Measuring the Cost of Living ?? Inflation Inflation refers to a situation in which the economy ’ s overall price level is rising. ? The inflation rate inflation rate is the percentage change in the price level from the previous period. Copyright ? 2004 South-Western THE CONSUMER PRICE INDEX ? The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. ? The Bureau of Labor Statistics reports the CPI each month. ? It is used to monitor changes in the cost of living over time. Copyright ? 2004 South-Western THE CONSUMER PRICE INDEX ? When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living. Copyright ? 2004 South-Western How the Consumer Price Index Is Calculated ? Fix the Basket: Determine what prices are most important to the typical consumer. ? The Bureau of Labor Statistics ( BLS ) identifies a market basket of goods and services the typical consumer buys. ? The BLS conducts monthly consumer surveys to set the weights for the prices of those goods and services. Copyright ? 2004 South-Western How the Consumer Price Index Is Calculated ? Find the Prices: Find the prices of each of the goods and services in the basket for each point in time. Copyright ? 2004 South-Western How the Consumer Price Index Is Calculated ? Compute the Basket ’ s Cost: Use the data on prices to calculate the cost of the basket of goods and services at different times. Copyright ? 2004 South-Western How the Consumer Price Index Is Calculated ?? Choose a Base Year pute the Index: Choose a Base Year pute the Index: ? Designate one year as the base year, making it the benchmark against which other years pared. ? Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100. Copyright ? 2004 So
