The consumer price index (CPI) measures the cost of a basket of goods and services relative to the base year, and is used to calculate the inflation rate. The CPI imperfectly measures cost of living due to substitution bias, new products, and unmeasured quality changes, causing it to overstate inflation by about 1% annually. The GDP deflator differs from the CPI by including all domestic production rather than consumption, and automatically adjusting its basket over time.

1. Measuring the Cost of Living

11. Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western 06/07/09

12. Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western 06/07/09

13. Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western 06/07/09

14. Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western 06/07/09

15. Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western 06/07/09

17. FYI: What’s in the CPI’s Basket? Copyright©2004 South-Western 06/07/09 16% Food and beverages 17% Transportation Medical care 6% Recreation 6% Apparel 4% Other goods and services 4% 41% Housing 6% Education and communication

29. Figure 2 Two Measures of Inflation 1965 Percent per Year 15 10 5 0 1970 1975 1980 1985 1990 2000 1995 Copyright©2004 South-Western 06/07/09 CPI GDP deflator

32. Table 2 The Most Popular Movies of All Times, Inflation Adjusted Copyright©2004 South-Western 06/07/09

37. Figure 3 Real and Nominal Interest Rates 1965 Interest Rates (percent per year) 15 10 5 0 – 5 1970 1975 1980 1985 1990 1995 2000 Copyright©2004 South-Western 06/07/09 Real interest rate Nominal interest rate