Chapter 24 - Measuring the Cost of Living

Flashcards about measuring the cost of living using the consumer price index.

What is the Consumer Price Index (CPI)?

It is based on the cost of a market basket of goods and services that a typical urban consumer buys on a regular basis.

How is the CPI calculated?

To determine what the basket is, collect data on prices, compute the basket's cost, and convert it into an index number.

How do you compute the CPI for any year?

Cost of market basket in current year divided by cost of market basket in base year, times 100.

How do you calculate the inflation rate during a given period?

Calculate the percentage change in the CPI from the preceding period.

What are the categories of products included in the CPI basket?

Housing, transportation, food and beverages, medical care, recreation, education and communication, apparels, and other.

What are the problems associated with the CPI?

Substitution bias, introduction of new products, and unmeasured quality changes.

How does substitution bias affect the CPI?

Overstates increases in the cost of living because it uses a fixed basket of goods.