chp. 24

This chapter examines how economist measure the overall cost of living by using the Consumer price index (CPI) which is a measure of the overall cost of goods and services bought by a typical consumer. It monitors changes in the cost of living over time. A rise in the consumer price index means that the typical family has to spend more dollars to maintain the same standard of living.The inflation rate is the percentage change in the price level from the previous period. When the Bureau of labor calculates the consumer price index and the inflation rate it uses data on the prices of thousands of goods and services. The first step would be to determine which prices are the most important to the typical consumer. The next step is to find the price of the products in three different periods. Quantity is kept the same to isolate the effect of price changes from the effect of any quantity changes. After that a base year is chosen and the index is calculated. The index is calculated by taking the price of the basket of goods and services over the price of the basket in the base year multiplied by 100. The index is always 100 in the base year. Lastly the inflation rate is calculated which is the percentage change in the price index from the preceding period and is calculated by
[(CPI in year 2  -- CPI in year 1)/ CPI in year 1] x 100. The BLS also calculates the producer price index which is a measure of the cost of a basket of goods and services brought by firms.