Term
| Consumer Price Index (CPI) |
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Definition
Measure of the overall cost of goods and services bought by a typical consumer.
CPI = (Price of Basket of goods or services in current year/Price of basket in base year) * 100 |
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Term
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Definition
1. Survey consumers to determine a fixed basket of goods (which prices are more important to consumers; prices of the goods a typical consumer buys the most of. Eg. 4 hot dogs and 2 hamburgers).
2. Find the Prices.
3. Compute the basket's cost (use the data to calculate the basket's price at different times).
4. Choose a base year and compute the index.
5. Compute the inflation rate. |
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Term
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Definition
| The measure of the underlying trend of inflation. It excludes the goods most volatile to inflation. |
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Term
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Definition
The introduction of new goods (adding variety and thus making each dollar more valuable) and the fluctuating prices of goods from year to year somewhat obsoletes the fixed basket, and thus makes CPI inefficient at times.
Unmeasured quality changes. |
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Term
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Definition
| Automatic correction of a dollar amount for the effects of inflation by law or contract. |
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Term
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Definition
| Interest rate reported via change in dollar amount. Not corrected for inflation. |
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Term
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Definition
Interest rate reported after being corrected for inflation. Can be negative (decrease in purchasing power) during periods of high inflation and low interest on savings.
Real Interest Rate = Nominal Interest Rate - Inflation Rate |
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