Transcript
The Consumer Price Index, CPI, is a basket of goods and services purchased by the typical urban consumer.
The CPI measures the “cost of living” by comparing the price of the market in the base year to all other years.
The CPI uses a market basket purchased by the typical urban consumer. The market basket is divided into eight categories.
Those categories are:1. Housing 42% of the basket2. Transportation 17% 3. Food and Beverages 15% 4. Medical Care 7%5. Education and Communication 6%6. Recreation 5%7. Apparel 4%8. Misc. 3$
The following is an example of some of the items found in each of the categories of the CPI.
This list is NOT inclusive. It is only used to give a brief overview of some of the goods found in the basket.
Housing
The CPI uses “equivalent rent” to compute housing prices. Equivalent rent is simply what homeowners would pay if they were renting their homes .
House Furniture
Electricity
Transportation
Some of the items placed in the CPI basket for transportation include spending on used and new cars, gasoline, and airline transportation
Food and Beverage
The food and beverage category contains the types of foods and beverages the typical urban consumers purchases and also includes eating out
Health Care (Medical)
Some of the items placed in the CPI basket for health care includes spending on health insurance, glasses, and prescription drugs
Education and Communication
Some of the items placed in the CPI basket for education and communication include spending for tuition, cell phone service, and computers
Recreation
Some of the items placed in the CPI basket for recreation includes spending on books, bikes, and admission to concerts, etc.
Apparel
Some of the items placed in the CPI basket for apparel includes spending on men's clothing and women's clothing
Miscellaneous
Some of the items placed in the CPI basket for miscellaneous include haircuts and styling and tailoring services
So all the goods and services are added up and put in the market basket.
Transportation
Housing
Food and Beverages
Education and Communication
Medical Care
RecreationApparel
Miscellaneous
What we do with the basket is compare it to the cost of the
basket in other years.
2012: $7,000 2013: $7, 500 2014: $8,000
Remember that the CPI is an INDEX NUMBER so we need to convert the market basket price to an index number.
To do this we must choose a base year to compare the cost of the other baskets to.
2012: $7,000
Let’s use 2012 as the base year
The formula for the CPI is simply:
Base Year
Current Year
100
Base Year
Current Year
100
Calculating the Index Number when the base year is also the current year
$7,000
$7,000
($7,000/$7,000) x 100 = 100
The index number when the base year is the current year is ALWAYS 100
Base Year
Current Year
100
Calculating the Index Number when the current year is 2013 (current year cost of market basket is $7,500)
$7,000
$7,500
($7,500/$7,000) x 100 = 107.14
Base Year
Current Year
100
Calculating the Index Number when the current year is 2014 (current year cost of market basket is $8,0000)
$7,000
$8,000
($8,000/$7,000) x 100 = 114.28
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