Principles of Macroeconomics: Chapter 11 - Measuring the Cost of Living presents objectives how Consumer Price Index (CPI)is defined and calculated, problems in measuring the cost of living, use the CPI to compare dollar amounts from different years, correct interest rate for inflation. | Chapter 11 Principles of Macroeconomics, N. Gregory Mankiw (Fifth Edition) Objectives How Consumer Price Index (CPI)is defined and calculated Problems in measuring the cost of living Use the CPI to compare dollar amounts from different years Correct interest rate for inflation Inflation Inflation Economy’s overall price level is rising GDP deflator in year 2 - GDP deflator in year 1 Inflation in year 2 = 100 GDP deflator in year 1 The consumer price index = a measure of the overall cost of the goods and services bought by a typical consumer CPI is computed by the Bureau of Labor Statistics (BLS) The goal of the CPI is to measure changes in the cost of living How the CPI is calculated 1. Fix the basket The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” 2. Find the prices The BLS collects data on the prices of all the goods in the basket. 3. Compute the basket’s cost 4. Choose a base year and compute the index price of basket in current year CPI = 100 price of basket in base year
