AP Macroeconomics / Unit 2: Economic Indicators and the Business Cycle
2.4 Price Indices and Inflation
Notes
- CPI $\displaystyle =\frac{\text{cost of basket now}}{\text{cost in base year}}\times100$.
- Inflation rate $\displaystyle =\frac{CPI_{new}-CPI_{old}}{CPI_{old}}\times100$.
- CPI can overstate inflation (substitution bias, new goods, quality changes).
Practice
CPI goes from 200 to 210. Inflation:
$\displaystyle \frac{10}{200}$.
The CPI in the base year is always:
By definition.
Substitution bias means CPI:
People switch to cheaper goods.
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