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Consumer Price Index

Consumer Price Index. Unit Seven, lesson three Economics. Ever wonder why prices change from year to year. Avg. price of new car in 1936. $665 Average income 1936 $1713 Average house $3925 And Cokes really did cost a nickel. Prices in 2010. New cars – about $25,000 Houses – $166,100

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Consumer Price Index

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  1. Consumer Price Index Unit Seven, lesson three Economics

  2. Ever wonder why prices change from year to year

  3. Avg. price of new car in 1936 • $665 • Average income 1936 $1713 • Average house $3925 • And Cokes really did cost a nickel

  4. Prices in 2010 • New cars – about $25,000 • Houses – $166,100 • Average Income - $55,000

  5. Consumer Price Index (CPI) • CPI is compiled by the Bureau of Labor Statistics (BLS) and is used by the government to measure the rate of inflation from month to month • Inflation--a rise in the general level of prices in an economy

  6. CPI • Measures the overall cost of the goods and services bought by a typical consumer • Uses a fixed basket of goods (what the average consumer buys in a year)

  7. CPI • The idea of the CPI is to see how prices change from year to year • The BLS compares the prices of the basket of goods from year to year to see how the cost of living has changed for the average consumer

  8. Calculating the CPI CPI = Price of new year market basket x 100 Price of base year market basket Rate of Inflation = CPIn - CPIb x 100 CPIb

  9. CPI Example

  10. Problems with the CPI • Substitution bias--doesn’t show consumers changing the number in their basket of a certain good due to price changes • Introduction of new goods not represented

  11. Problems with CPI • Unmeasured quality change--prices change as qualities improve

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