Chapter 24

Chapter 24 is about calculating the cost of living. The consumer price index (CPI) is used to observe changes in the cost of living over time. CPI is a measure of the overall cost of goods purchased  by an average consumer. The inflation rate is the percentage change in the prices from previous levels. The Bureau of Labor produces only reports on the consumer price index. These are the steps in calculating consumer price index: 1. Survey consumers to get a fixed basket of goods. 2. Find the rice of each good per year. 3. Compute the basket's cost. 4. Choose a base year and compute the index. 5. Compute the inflation rate. Three problems with the consumer price index are substitution bias, the introduction of new goods, and unmeasured quality change. The producer price index is a measure of how much an average producer pays for a good or service rather than a consumer. One difference between GDP deflator and CPI is that GDP deflator reflects all the prices of goods/services domestically produced, meanwhile CPI reflects the prices of goods/services bought by consumers. The second difference is that the CPI compares the price of a fixed basket of goods/services to the price of the basket in the base year. Meanwhile, the GDP deflator compares the price of currently produced goods/services to the price of the same goods/services in the base year. Real interest rate equals the nominal interest rate minus the inflation rate. The real interest rate tells you how fast the purchasing power of your bank account rises over time.