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The consumer price index

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Intros
Lessons
  2. Consumer Price Index Definition
    • Average of the prices of a fixed basket of goods
    • Properties of CPI
    • Reference base period
    • Percent increase from two years
  3. Calculating CPI
    • Cost of basket at current period
    • Cost of basket at base period
    • Multiply by 100
    • An Example
  4. Measuring Inflation Rate with CPI
    • CPI of this year subtracted by CPI of last year
    • Divide by CPI of last year
    • Multiply by 100
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Examples
Lessons
    Topic Notes
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    The Consumer Price Index Definition

    Consumer Price Index (CPI): measures changes in the price level of a fixed basket of consumer goods and services.

    Properties of CPI:
    1. Is equal to 100 at the reference base period.
    2. If CPICPI > 100, then prices are higher than the ones in the base year.
    3. If CPICPI < 100, then prices are lower than the ones in the base year.
    4. CPICPI - 100 gives the percent increase/decrease in the average of the prices of the basket of consumer goods and services.


    Calculating the CPICPI

    To calculate CPICPI, we use the following formula

    CPICPI = Cost  of  Basket  at  current  periodCost  of  Basket  at  base  period  ×100\frac{Cost\;of\;Basket\;at\;current\;period} {Cost\;of\;Basket\;at\;base\;period} \;\times 100


    To calculate the cost of a basket of two goods, we use the following formula

    Cost of Basket = pxqx+pyqyp_{x}q_{x} + p_{y}q_{y}


    Where:
    pxp_{x} = price of good xx
    qxq_{x} = quantity of good xx
    pyp_{y} = quantity of good yy
    qxq_{x} = quantity of good yy

    Measuring Inflation Rate with CPI

    To calculate the inflation rate, we use the following formula:

    Inflation Rate = CPI this  year− CPI last  yearCPI last  year\frac{CPI_{\,this\;year} - \, CPI_{\,last\;year} } {CPI_{\,last\;year}}