Chapter Summary:
Chapter 7 is called the CPI and the Cost of Living. CPI is a measure of the average of the prices of the goods and services that an average urban household buys. It is calculated by dividing the cost of the CPI market basket in the current period by its cost in the base period and then multiplying by 100. But CPI cannot provide an accurate measure of price changes because of new goods, quality improvements, and substitutions that consumer make when relative prices change. There are also some other methods that can measure the price level, such as PCE price index. Both GDP price index and PCE price index use current information on quantities and to some degree overcome the sources of bias in the CPI. The real wage rate equals the nominal wage rate divided by the CPI and multiplied by 100. The real interest rate equals the nominal interest rate minus the inflation rate.
My Response:
Nowadays, CPI plays an important role in our daily life. We can use CPI to measure in inflation rate, which is the percentage change in the price level from one year to the next. If the inflation rate is negative, then we can conclude that the price is falling and deflation occurs. Sometimes, we call CPI as the cost of living index. It is a measure of the change in the amount of money that people need to spend to achieve a given standard of living. But CPI is not always a perfect measure of the cost of living because it leads to the distortion of private contracts and increase
