Foundations of Economics, 8th Edition

Chapter Summary

Key Points

1. Explain what the Consumer Price Index (CPI) is and how it is calculated.

   • The Consumer Price Index (CPI) is a measure of the average of the prices of the goods and services that an average urban household buys.

   • The CPI is calculated by dividing the cost of the CPI market basket in the current period by its cost in the base period and then multiplying by 100.

2. Explain the limitations of the CPI and describe other measures of the price level.

   • The CPI does not include all the items that contribute to the cost of living.

   • The CPI cannot provide an accurate measure of price changes because of new goods, quality improvements, and substitutions that consumers make when relative prices change.

   • Other measures of the price ...