# ECN 204 Lecture Notes - Gdp Deflator, Nominal Interest Rate, Real Interest Rate

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Chapter 6 Measuring the Cost of Living

Consumer Price Index: a measure of the overall cost of the goods and services bought by a typical

customer (Stats Canada computes this every month)

How the CPI is calculated

1) Determine the basket: determine which prices are most important to the typical customer.

Stats Canada usually surveys consumers (example, more people buy hot dogs than hamburgers)

2) Find the prices: find the prices of each of the goods and services in the basket for each point in

time. (different months, years)

3) Compute the basket’s cost: compute the cost by multiplying the price of the good/service and

the quantity for each year

4) Choose a Base year and compute the index: designate one year as the base year

Calculation:

CPI = Price of basket of goods in Current year/Price of basket in Base year x 100

5) Compute the Inflation rate: use the CPI to calculate the inflate rate which is the percentage

change in the price index from the preceding period

Calculation:

Inflation Rate in year 2= CPI in year 2 – CPI in year 1/CPI in year 1 x 100

Core Inflation: the measure of the underlying trend of inflation

Example 1:

Activity #1

Question 1: Compute the CPI in 2009

Answer:

Cost of CPI basket in 2009 = ($5 x 10) + ($5 x 20) = $150

CPI in 2009= 100 x ($150/$120) = 125