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How do you calculate CPI
Cost of the basket (current year)/Cost of basket (base year) X 100
How do you calculate inflation
CPI Current year-CPI last year/ CPI last year X 100
what makes up the biggest part of CPI
Housing
what is substitution bias in CPI
Over time, some prices rise faster than others. Consumers substitute toward goods that are relatively cheaper, meaning that CPI overstates increases in the Cost of Living.
Introduction of new goods in CPI
When new goods become available, variety increases, allowing consumers to find goods more tailored to their needs. This makes the value of each dollar more valuable and thus, CPI overstates the cost of living
Unmeasured Quality Change in CPI
improvements in the quality of goods in the basket increase the value of each dollar, quality changes are sometimes misses, and thus CPI overstates the cost of living
Differences in CPI and GDP Deflator
CPI accounts for what is in a typical consumer’s shopping basket, while the GDP Deflator accounts for all goods and services produced domestically
Captial goods are excluded from the CPI but included in the GDP deflator if produced domestically
Imported consumer goods are included in the CPI but excluded from the GDP deflator
How do you compare dollar figures from different times
multiply the past dollars by the ratio between the current and past CPI
[EX: 78,000 (1980 dollars) X CPI 2024/CPI 1980)]
what does it mean if a dollar amount is indexed for inflation
it is automatically corrected for inflation by law or contract
nominal interest rate
interest rate not corrected for inflation
rate of growth in the dollar value of a deposit or debt
real interest rate
interest rate corrected for inflation
rate of growth of the purchasing power of a deposit or debt
How do you calculate real interest rate
nominal interest rate- inflation rate
