Macroeconomics
Chapter 9
Inflation
9.4 Measuring Inflation
In the previous chapter we introduced the idea of the price level:
We refer to the percentage increase in the price level from one
year to the next as the _________.
Last chapter, we used the ___________to measure changes in
the price level. By measuring changes in the prices of different
baskets of goods, we would come up with different measures.
Two commonly–used measures are:
•The consumer price index (CPI)
•The producer price index (PPI)
Inflation rate
GDP Deflator
Figure 9.7 The CPI Market Basket,
December 2018
The __________is a
measure of the average of
the prices a typical urban
family of four pays for the
goods and services they
purchase.
The chart shows the
composition of the basket
of goods used to create
the CPI. This basket of
goods derives from a
survey of 14,000
households by the BLS.
Consumer price index
Calculating the CPI
To calculate the CPI in a given year, we need:
•A basket of goods
•The cost to purchase the basket of goods in a base year
•The prices in the current year
The CPI in the current year is the cost to purchase the
basket of goods this year, divided by the cost in the base
year. By convention, we multiply this by 100, so that the CPI
in the base year is 100.
A Simple CPI Calculation (1 of 2)
Product
Base
Year
(2010)
Quantity
Base Year
(2010)
Price
Base Year
(2010)
Expenditures
2020
Price
2020
Expenditures
(on base–year
quantities)
2021
Price
2021
Expenditures
(on base–year
quantities)
Eye
examinations
1$50 $50 $100 $100 $85 $85
Pizzas
20 10 200 15 300 14.00 280
Books
20 25 500 25 500 27.50 550
Total
Blank Blank $750 Blank $900 Blank $915
The table above gives the information we need to create the CPI
