Consumer price index: a measure of the overall cost of goods and services bought by a
1. Fix the basket: see which items are more important
2. Find the prices: for each point in time
3. Compute the basket’s cost: same quantity, different prices
4. Choose a base year and compute the index: find inflation / price change
( Price of basket of goods and services in current year / price of basket in base
year ) X 100
5. Compute the inflation rate: the percentage change in the price index from the
(CPI in year 2 – CPI in year 1) / (CPI in year 1) X 100
Producer price index: a measure of the cost of a basket of goods and services bought by
Predict changes in the consumer price index
Consumer price index measure changes in the cost of living
substitution bias: some prices change more than others.
Consumers substitute toward goods that have become relatively
Problem because there is a fixed basket for the amount of goods.
Introduction of new goods
More variety gives each dollar more value .
Unmeasured quality change
Unmeasured quality change: if the quality of a good deteriotates but price remains