The CPI or Consumer Price Index measuresO Inflation by monitoring the change in gas prices and food itemsO Real GDP by comparing average change over time in production of consumer goods and services.O Inflation by comparing the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.O Unemployment by comparing the production of consumer goods and services with potential production

Answered: The CPI or Consumer Price Index…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The CPI or Consumer Price Index measures
O Inflation by monitoring the change in gas prices and food items
O Real GDP by comparing average change over time in production of consumer goods and services.
O Inflation by comparing the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
O Unemployment by comparing the production of consumer goods and services with potential production

Expert Solution

Introduction

CPI: CPI or consumer price index can be defined as the weighted mean price of the set of commodities and services that consumers commonly consume in an economy. Clearly, it is the overall price level that prevails in an economy where the general price level is calculated by giving weightage depending on the volume of consumption of the respective commodities. A price index number is a macroeconomic metric that compares a set of prices over a period. It depicts the change in the price of a basket of certain products and services over time. For example, if the price index is 105, it implies that the current price has risen by 5%, from the base year’s price.

We can calculate the CPI using the following formula:

$C P I = \frac{C o s t o f m a r k e t b a s k e t i n t h e g i v e n y e a r}{C o s t o f m a r k e t b a s k e t i n b a s e y e a r} \times 100$