*We will be building our model to look at how the economy functions.
The consumer price index.
Consumer price index (CPI) A price index computed each month by the Bureau of Labor stats using a
bundle that is meant to represent the “market basket” purchased monthly by the typical urban
Producer price indexes (PPI’s) Measures of prices that producers receive for products at all stages in the
Once called wholesale price indexes, PPI’s are calculated separately for various stages in the production
The three main categories are finished goods, intermediate materials and crude materials, although
there are subcategories.
Prices move in different directions, how do we calculate it?
We look at the average change in prices, however we don’t simply look at the average, we look at the
percentage of each consumer.
Ex. What is the most expensive thing you pay for?
Look at the ratio/weight on the consumer.
Figure 7.1 – the market basket.
Look at what you spend on in your shopping basket and look at it for each person every year. Then get a
By doing this every month, you will get the price of everything in this basket and watch the change every
Over time, you see how prices change in each item.