Principles of Macroeconomics: Chapter 11 - N. Gregory Mankiw

Chapter 11<br /> <br /> Principles of Macroeconomics, N. Gregory Mankiw (Fifth Edition)<br /> <br /> Objectives<br />  How Consumer Price Index (CPI)is defined and<br /> <br /> calculated<br />  Problems in measuring the cost of living  Use the CPI to compare dollar amounts from<br /> <br /> different years<br />  Correct interest rate for inflation<br /> <br /> Inflation<br />  Inflation<br />  Economy’s overall price level is rising<br /> GDP deflator in year 2 - GDP deflator in year 1 Inflation in year 2 = 100 GDP deflator in year 1<br /> <br /> The consumer price index<br />  = a measure of the overall cost of the goods and<br /> <br /> services bought by a typical consumer<br />  CPI is computed by the Bureau of Labor<br /> <br /> Statistics (BLS)<br />  The goal of the CPI is to measure changes in the<br /> <br /> cost of living<br />  http://www.bls.gov/cpi/cpifaq.htm<br /> <br /> How the CPI is calculated<br /> 1. Fix the basket<br />  The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.”<br /> <br /> 2. Find the prices<br /> <br /> <br /> The BLS collects data on the prices of all the goods in the<br /> basket.<br /> <br /> 3. Compute the basket’s cost<br /> <br /> 4. Choose a base year and compute the index<br /> <br /> price of basket in current year CPI = 100 price of basket in base year<br /> <br />