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Lecture 8

Lecture 8 Price measurement-CPI

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Stephen Hickson

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 weights. 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 expenditure patterns. 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
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