Chapter 16 STATS.docx

13 views1 pages
30 Mar 2012
Chapter 16
The Consumer Price Index and Government Statistics
Index numbers
The CPI is a new kind of numerical description, an index number and index number can attach to
any quantitative variable that we measure repeatedly over time
An index number describes the percentage change from a base period
An index number measures the value of a variable relative to its value at a base period.
Index number = value / base value x 100
In news reports concerning the CPI, you will notice the mysterious equation “1982-82= 100”
(that’s a shorthand for the fact that the years 1982 to 1984 are the base period for the CPI)
An index number just gives the current value as a percentage of the base value
Index number 57 means that the current value is 57% of the base, 43% decrease
Fixed market basket price indexes
The term index number usually means more than a measure of change relative to a base
It also tells us the kind of variable whose change we measure
That variable is a weighted average of several quantities, with fixed weights
A fixed market basket price index is an index number for the total cost of a fixed collection of
goods and services
Holding the market basket fixed allows a legitimate comparison of prices because we compare
the prices of exactly the same items at each time
It also poses severe problems for the CPI
Using the CPI
Think of the CPI as an index number for the cost of everything that American consumers buy
An index number for “the cost of everything” lets us compare dollar amounts from different years
by converting all the amounts into dollars of the same year
Constant dollars, real incomes, real terms mean that all dollar amounts represent the same
buying power even though they may describe different years
Adjusting for changes in buying power : To convert an amount in dollars at time A to the
amount with the same buying power at time B:
Dollars at time B = dollars at time A x CPI at time B/CPI at time A
Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Notes+

Unlimited access to class notes and textbook notes.

YearlyBest Value
75% OFF
$8 USD/m
$30 USD/m
You will be charged $96 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.