The document discusses the consumer price index (CPI) and how it is used to measure inflation and the cost of living. The CPI tracks price changes of goods and services in a basket of products that represents the typical consumer purchases. It is calculated by selecting consumer items, finding their prices, totaling the costs, and setting up an index with a base year. Changes in the CPI from year to year are used to determine the inflation rate. There are challenges to the CPI related to substitution effects, new products entering the market, and changes in product quality over time.

1. Chapter 24
Measuring the
Cost of Living
College
of Business
AlfaisalUNIVERSITY

2. Consumer
Price
Index
CPI

3. CPI
Consumer Price Index
The market value of a
typical basket of goods.

4. Measure CPI - Five Steps
1. Select items for Basket
2. Find Prices
3.Total Cost
4. Pick BaseYear and compute Index
5. Compute Inflation Rate

5. What’s in the CPI’s Basket?
! Food and beverages
! Tobacco
! Clothing and footwear
! Housing
! Water & fuels
! Furnishings and house
repairs
! Health
! Transportation
! Communication
! Leisure
! Education
! Restaurant & hotels
! Miscellaneous
The basket will vary from country to country. The
following is an example of the basket in Lebanon

6. select items

7. find prices

8. total the cost

9. pick base year
and compute
index

10. CPI
Total Cost thisYear
Total Cost in base year
x 100

11. CPI Inflation Rate
CPIYear 2 - CPIYear 1
CPIYear 1
= x 100

12. Year Total CPI Inflation
2010 522 100.0
2011 544 104.2 4.2%
2012 532 101.9 -2.2%
2103 560 107.3 5.3%
2014 577 110.5 3.0%
2015 600 114.9 4.0%

13. Converting to Today
Price level today
Price level in prior year
Amount
in prior
year
X

14. I earned 100,000 in 2010 and
the CPI was 175.
In 2014 I earned 150,000 and
CPI was 250.
What year was I better off?

15. Year CPI Income
2010 175 100,000
2014 250 150,000
%Chg 42.9% 50.0%

16. Year
General
Index
Food and
non -
alcoholic
beverages
Tobacco
Clothing
and
Footwear
Housing ,
Water,
Electricity,
Gas, and
other fuels
Furnishing
s,
household
equipment
& Routine
Health Transport
Communic
ation
Recreation
and
Culture
Education
Restaurant
s and
Hotels
Miscellane
ous goods
and
services
1988 86.9 71.3 67.0 140.6 72.4 107.9 92.2 111.0 74.0 117.0 85.0 87.3 89.8
1989 87.9 72.5 67.2 136.6 70.8 106.6 94.8 112.5 129.5 115.9 87.0 87.0 88.5
1990 87.0 74.5 67.8 136.7 71.0 106.9 95.4 98.1 151.4 114.4 86.0 87.9 85.1
1991 90.3 79.7 74.2 135.4 74.3 108.4 95.3 101.9 151.4 117.6 86.5 91.0 86.3
1992 89.5 82.0 78.6 134.8 75.3 109.5 97.1 96.4 104.1 120.3 87.6 91.6 85.7
1993 90.6 83.0 79.0 133.7 79.5 109.9 97.1 95.9 88.4 118.5 88.8 92.7 86.8
1994 91.8 81.8 78.9 131.9 84.6 108.8 96.5 97.2 88.4 117.1 89.8 92.4 87.8
1995 96.6 81.6 79.0 130.4 90.5 108.6 96.8 111.7 143.0 115.0 92.2 93.4 88.3
1996 96.8 83.9 79.0 126.5 90.5 108.1 96.0 110.7 143.0 114.7 93.6 93.6 87.8
1997 96.5 84.9 85.7 124.8 90.5 106.3 96.5 108.5 143.0 113.6 94.8 93.1 84.8
1998 96.2 84.8 95.9 123.2 90.0 107.0 97.4 107.6 142.1 113.1 95.7 93.5 82.1
1999 94.2 82.6 96.2 117.2 89.8 106.3 97.7 102.3 136.6 110.4 96.2 94.0 81.2
2000 93.2 81.2 94.4 111.5 89.8 103.8 98.9 102.5 136.9 106.6 98.1 93.7 81.1
2001 92.0 80.5 90.9 109.0 89.8 102.2 98.4 98.4 132.7 106.1 98.6 92.8 80.2
2002 92.1 80.6 97.0 108.2 89.8 101.0 98.5 99.6 128.3 105.3 99.2 93.8 81.3
2003 92.6 82.9 98.0 107.7 89.8 100.0 98.7 99.4 122.9 103.2 99.5 94.3 83.1
2004 92.9 85.4 98.4 105.6 90.0 97.6 98.9 99.2 120.2 99.8 100.8 93.9 84.1
2005 93.4 88.2 97.5 103.8 89.7 98.7 98.7 100.1 104.2 98.8 102.1 94.2 85.8
2006 95.2 93.8 97.7 103.6 90.7 98.4 100.0 97.0 100.6 97.9 103.1 96.5 91.9
2007 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
2008 106.1 113.7 105.1 101.0 108.5 103.2 103.2 97.0 98.1 97.7 110.3 103.2 101.6
2009 110.5 116.4 107.3 101.6 120.1 105.6 103.2 98.2 98.2 99.2 111.8 110.0 104.9
2010 114.7 120.8 119.2 101.1 129.2 107.0 103.3 99.7 97.7 97.2 113.2 113.8 110.1
2011 119.0 127.1 126.7 99.7 143.9 115.5 103.4 103.1 92.0 104.7 108.7 117.0 113.9
2012 122.4 132.9 141.3 103.3 148.7 117.5 105.6 108.3 92.1 104.5 110.2 121.7 117.8
2013 126.7 140.5 153.1 104.8 153.8 122.6 109.0 111.0 93.8 106.3 112.6 126.8 117.6

17. Problems with CPI
1. Substitution
2. New goods
3. Changes in Quality

18. Substitution
Price
Quantity

19. New Goods
1983

20. New Goods
Added in 1998

21. Quality
2007 - $600 2015 - $600

22. 1.Starbucks raises the price of Frappuccinos.
2. A local manufacturer raises the price of the
industrial tractors it produces.
3. Armani raises the price of the Italian jeans it
sells (in your own country).

23. 1.Starbucks raises the price of Frappuccinos.
The CPI and GDP deflator both rise.
2. A local manufacturer raises the price of the
industrial tractors it produces.
The GDP deflator rises, the CPI does not.
3. Armani raises the price of the Italian jeans it
sells (in your own country).
The CPI rises, the GDP deflator does not.