Consumer Price Index

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Consumer Price Index

• Unit Seven, lesson three
• Economics

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Ever wonder why prices change from year to year
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Avg. price of new car in 1936

• 665
• Average income 1936 1713
• Average house 3925
• And Cokes really did cost a nickel

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Prices in 2010

• New cars about 25,000
• Houses 166,100
• Average Income - 55,000

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Consumer Price Index (CPI)

• CPI is compiled by the Bureau of Labor Statistics
  (BLS) and is used by the government to measure
  the rate of inflation from month to month
• Inflation--a rise in the general level of prices
  in an economy

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CPI

• Measures the overall cost of the goods and
  services bought by a typical consumer
• Uses a fixed basket of goods (what the average
  consumer buys in a year)

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CPI

• The idea of the CPI is to see how prices change
  from year to year
• The BLS compares the prices of the basket of
  goods from year to year to see how the cost of
  living has changed for the average consumer

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Calculating the CPI

• CPI Price of new year market basket x 100
• Price of base year market basket
• Rate of Inflation CPIn - CPIb x 100
• CPIb

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CPI Example
Milk Cookies Paper Plates
2000 Price 2 5 3
2000 Quan 50 75 25

2001 Price 3 6 5
2001 Quan 50 75 25

2002 Price 3 6 6
2002 Quan 50 75 25
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Problems with the CPI

• Substitution bias--doesnt show consumers
  changing the number in their basket of a certain
  good due to price changes
• Introduction of new goods not represented

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Problems with CPI

• Unmeasured quality change--prices change as
  qualities improve