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H ow to C a lculate Inflation : HL only

H ow to C a lculate Inflation : HL only. B & D pages 236-8. How the Consumer Price Index Is Calculated: 4 steps. Fix the Basket : Determine what products are most important to the typical consumer, and “weight” them by quantity.

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H ow to C a lculate Inflation : HL only

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  1. How to Calculate Inflation: HL only B & D pages 236-8

  2. How the Consumer Price Index Is Calculated: 4 steps • Fix the Basket: Determine what products are most important to the typical consumer, and “weight” them by quantity. • Collect the price data from a sample of retailers in a certain time period. • Compute the Basket’s Cost: Use the data on prices to calculate the cost of the basket of goods and services. • In the first (base) year, basket cost = 1000.

  3. Calculating the Consumer Price Index and the Inflation Rate: An Example Step 1:Survey Consumers to Determine a Fixed Basket of Goods

  4. Calculating the Consumer Price Index and the Inflation Rate: An Example Step 2: Find the Price of Each Good in Each Year

  5. Calculating the Consumer Price Index and the Inflation Rate: An Example Step 3: Compute the Cost of the Basket of Goods in Each Year

  6. Step 4: Choose One Year as the Base Year (2001) and Compute the Consumer Price Index in Each Year

  7. How the Inflation Rate Is Calculated The inflation rate is: the percentage change in the price indexes:from the preceding period to the present. 2002: 75% 2003: 43%

  8. Calculating the Consumer Price Index and the Inflation Rate: Another Example • Base Year is 1999, when the basket of goods costs $1,200; so then the CPI ($1200/$1200) x 1000 = 1000. • The same basket in 2000 costs $1,236; so then the CPI = ($1,236/$1,200) X 1000 = 1030. • Inflation = 1030 – 1000 x 100 = ? • 3 percent between 1999 and 2000.

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