ECON105 Lecture 8: Price Measurement – CPI
Inflation definition: An increase in the overall price level in the economy.
Some prices fall, some prices rise, but overall price level increase
Deflation: Falling price level
New Zealand’s price level is measured by the CPI (Consumers Price Index) which measures the
overall cost of a basket of goods and services bought by a typical household.
How the Consumer Price Index is calculated?
1. Fix the basket
We fix the basket to determine which prices are most important to the typical consumer.
Typical household baskets contain things they commonly buy. We hold the quantity of
goods/services in the basket fixed to see the price changes. Things in the basket are called
Expenditure weights in the CPI measure the importance of items bought by households.
Over time what households buy changes. They are revised periodically to reflect changing
2. Choose a base period and Compare the index number
A CPI index number on its own means nothing. It must be compared to another time period
to get a percentage change. Indexes commonly have an expression base of 1000 which is
merely a convenie