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### Course: AP®︎/College Macroeconomics>Unit 2

Lesson 4: Price Indices and inflation

# Example question calculating CPI and inflation

The Consumer Price Index (CPI) is a measure of the average change in prices of a typical basket of goods and services over time. It is used to gauge inflation and changes in the cost of living. The CPI might overstate changes in the cost of living because it doesn't always account for how people adjust their spending when prices change.

## Want to join the conversation?

• This seems like a different calculation approach than the "percentage of expenditures" approach in the Intro to Inflation video. Here Sal only looks at the changes in the costs of the goods (easier).

In Intro to Inflation, Sal uses the 60%/40% base-year percentages of a household's expenditures on each good to give different weights to the inflated prices.

That method would have required a few more steps than this video took, and it would yield different answers on an exam.

Which is right?
• Sal made a mistake in the Intro. The Consumer Price Index (CPI) cannot be calculated using percentages alone; it requires real numbers for the amount of goods in the basket.

It is necessary to have specific quantities or amounts of goods in the basket to calculate the CPI, as the CPI aims to measure the average price change of a fixed set of goods and services over time. Thus, the CPI cannot be derived from 60%/40% base-year percentages.

Please correct me if I am mistaken :)
• My 2016 = 177 and 2017 = 221 why is it different
• Your 2016 should be 100 by definition. The base year is always 100.
• I've been told we're not able to use calculators on the AP Exam, so if a question like the sample problem part a, what do we do?
• On the AP Exam, if calculators are not allowed, you should manually perform calculations, basically, just learn how to preform the calculations.
• For calculating the CPI, shouldn't the entire total cost spent in a year be taken rather than a week?
• Yes that's correct.
• WHO INVENTED INFLATION? he needs to not exist....
• why is the base year 100 dollars
• How does the CPI account for changes in consumer spending behavior due to price fluctuations?
• at Sal says-"inflation lower actual growth in cost of living." So, *I didn't get this point what it means and how it's overstate cost of living?*
• the question was about how the changes in the inflation rate create changes in the cost of living. In this case, since cream cheese is considered cheaper (due to its unchanged rate of inflation comparatively) which means people would buy more of the 'cheaper' good, rather than the bread or books. It does not create growth in the cost of living as the high costs of the book and the bread is sort of balanced out by buying less of it, and rather turning to buy more of the cream cheese.
• why the answer of c is 100, I calculated by 186/93*100=200
• cuz the formula is (CPI of that year/CPI of base year)/CPI of base year, which means the answer is (186-93)/93 = 93/93 = 100%
• 5. Explain the meaning and uses of a pie diagram. Prepare a pie diagram of family expenditure from the following data:

S.No. Items Expenditure (`.)
1.

2.

3.

4.

5. Food

Clothing

Education and Entertainment

Rent

Miscellaneous

Total Expenditure
480

300

330

450

240

1880