Measuring the Cost of Living

These flashcards cover key concepts related to measuring the cost of living, including definitions and details on CPI, inflation rates, and related economic terms.

Consumer Price Index (CPI)

A measure of the overall cost of the goods and services bought by a typical consumer, computed and reported monthly by the Bureau of Labor Statistics.

Inflation Rate

The percentage change in the price index from the preceding period.

CPI Calculation Steps

1. Fix the basket 2. Find the prices 3. Compute the basket’s cost 4. Isolate the effects of price changes.

Substitution Bias

When consumers substitute toward cheaper goods as some prices rise faster than others, leading the CPI to overstate increases in the cost of living.

Core CPI

Measure of the overall cost of consumer goods and services excluding food and energy.

Producer Price Index (PPI)

A measure of the cost of a basket of goods and services bought by firms, useful for predicting changes in CPI.

GDP Deflator

The ratio of nominal GDP to real GDP, reflecting prices of all goods and services produced domestically.

Indexation

The automatic correction by law or contract of a dollar amount for the effects of inflation.

Real Interest Rate

Interest rate corrected for the effects of inflation; it equals the nominal interest rate minus the inflation rate.

Nominal Interest Rate

Interest rate as usually reported without a correction for the effects of inflation.