30 Mar 2012

School

Department

Course

Professor

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