Alright. Let's continue here, and we're going to use the cost of the basket that we calculated in the previous video, and we're going to use those costs of the basket to calculate CPI for each year. Okay? So when we calculate CPI, just like we had when we were calculating GDP, nominal GDP, real GDP, what we're going to use, as in real GDP, we had the base year. Right? We're going to pick a year as our base year. And in this question, they don't mention what the base year is. So we're going to assume that the oldest year, which is generally what you're going to do, is the base year. 2017 is going to be the base. If they don't tell you otherwise, if they don't specify which year is the base year, you're just going to use the oldest year, 2017 in this case. Cool? So let's go ahead and use our formula here to calculate CPI in each year. So we're going to take the basket cost in the current year divided by the basket cost in the base year times a hundred to get the CPI. Okay? So the current year basket cost depends on what year we're talking about. In 2017, the current year, well, that's 2017. So guess what the CPI is going to be in the base year? We're going to take the current cost in 2017 of $17.50 and divide it by the base year, which is also 2017. So guess what? It's also $17.50, and multiply it by a hundred. Well, guess what? $17.50 divided by $17.50 is just 1, times a hundred. We're going to get a hundred for our CPI here. And that's always going to be true for the base year. The base year is going to be a hundred because that's how the calculation works. Right? Where the division of the basket is always going to give us 1 in the base year and our CPI will always equal a hundred in the base year. So let's go ahead to 2018 and let's calculate the CPI there. So what's going to be our numerator in the basket cost? We're going to use the current year. So in 2018, the basket cost of the basket was $1,902.50 and we'll divide that by what? We'll use the base year. Right? The bottom is always going to be the base year which is $17.50. So that $17.50 is not going to change in any of our calculations. It's always going to be the base year cost of the basket. So we'll multiply that by a hundred to get our CPI. $1,902.50 divided by $17.50 times a hundred and we'll go to 2 decimal places here. That's generally what we do with CPI, we'll go to 2 decimal places. So it came out to $108.71 is where we'll call it right there. Cool? Let's do the same thing for 2019. So why don't you guys try this one? Pause real quick, try it and then follow along with me. I'm sure you'll be able to get it after we've done these practices. This isn't too tough of a calculation. So I'm guessing you guys paused it and you started it up again. Let's go ahead and calculate 2019 CPI. So what's going to be our numerator? We're going to use the 2019 basket cost, $2,135 divided by the base year, 1750. Notice, it's not the previous year. We still use the base year which is 2017, and we multiply that by a hundred. So let's go ahead and, excuse me. Do that calculation. $2,135 divided by $17.50 times a hundred and we get exactly $122.00 there. So $122 is the CPI in 2019. Cool. Let's go ahead and use this information to calculate the inflation rate for each year. So let me leave that on the screen, those CPI figures. Cool. Alright. So in 2017, we're not going to calculate an inflation rate because we have to go, what is the change from one year to the next? Since 2017 is our first year, we're not going to have an inflation rate. What we're going to see is in 2018, how much did the prices rise between 2017 to 2018? Cool? So look at our formula here. We're going to take the current year minus the prior year divided by the prior year. What does this look like to you? This looks like a percentage change formula, right? Remember when we talked about the percentage change? The percentage change is the easy way that I like to remember it. It's just the new minus the old divided by the old. Okay? New minus old divided by old. That gives us the percentage change. How much did this change from the previous, the old to the new year, the current year? Okay. So in 2017, we're not going to calculate an inflation rate because it's the first year. There's no inflation from the first year to the first year. Let's see how it goes from 2017 to 2018, how the prices changed. So we're going to take our CPI, which was in 2018, 108.71. We're going to subtract the previous year of 100 and divide it by a 100. And then obviously, we'll multiply it by a hundred to get a percentage, but to save space, I'm not going to put the multiply times a hundred. We're just going to go $108.71 minus $100 divided by $100 and then times a hundred. So obviously, we're going to end up getting 8.71% and that's always going to be like that in the year after the base year because the base year has that $100 CPI. It makes the calculation a little simple there. You could see that the 8.71 that was the inflation rate. But why don't you guys pause real quick and try the same thing for 2019. You guys try and calculate the inflation rate and then follow along, and we'll see how you did. All right? So, pause real quick. I'm guessing you guys gave it an attempt, and now we're going to follow through here and finish up if the inflation for 2019. So what are we going to do here? We're going to take the current year in 2019, which was $122 CPI, minus the previous year. Notice the difference here. When we are calculating the CPI, we were always doing it by the base year, but now we're just going from year to year. What is the inflation from 2018 to 2019? Not from the base year to 2019, from 2018 to 2019. So it's just the previous year. The previous year CPI was 108.71, and we're going to divide it by 108.71. Right? New minus old divided by old. Cool. $122 minus $108.71. So let's go ahead and do that math. $122 minus $108.71, So that's our numerator divided by $108.71, and that gives it to us as a decimal. So we multiply by a hundred, and we're going to get a CPI to 2 decimal places of, excuse me, an inflation rate of $12.23%. So that means that the prices had risen between 2018 prices and 2019 prices by 12.23%. So in that one year, the prices went up 12% about 12%. Cool? So that's how we use our CPI to help us calculate the inflation rate, and this is generally how it's done. We're going to have a CPI, and we use it to calculate inflation. Sometimes, a question will give you the CPI numbers and then just ask you to calculate inflation. A more complicated question might ask you to use the basket cost to calculate CPI and then use those CPIs to calculate inflation just like all the steps we went through here. So one last thing about CPI is what we have here is the actual basket of goods that is used in the US survey. So you'll see that the government surveys approximately 14,000 households to find their basket of goods, to find what they're spending their money on, and then they use those spendings to create the basket of goods and track those prices over time. So you'll notice that housing is generally the biggest spending bucket that we have, then food and beverages, and then we've got all these other things here. Education, other, medical, transportation. Oh, it looks like transportation is just about as big as food and beverages there. Cool. So you don't need to know this. I just added this in there just so you can see how the actual basket of goods is more complicated than what we did in our example with just two products. Generally, in this class, when you have to solve these problems, they're not going to have you do a giant basket of goods. It'll generally be one, two or three products being tracked in the CPI. Cool? Let's pause here and let's move on to the next video.
Table of contents
- 1. Introduction to Macroeconomics1h 57m
- 2. Introductory Economic Models59m
- 3. Supply and Demand3h 43m
- Introduction to Supply and Demand10m
- The Basics of Demand7m
- Individual Demand and Market Demand6m
- Shifting Demand44m
- The Basics of Supply3m
- Individual Supply and Market Supply6m
- Shifting Supply28m
- Big Daddy Shift Summary8m
- Supply and Demand Together: Equilibrium, Shortage, and Surplus10m
- Supply and Demand Together: One-sided Shifts22m
- Supply and Demand Together: Both Shift34m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 26m
- Percentage Change and Price Elasticity of Demand19m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Price Floors3h 40m
- Consumer Surplus and WIllingness to Pay33m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Floors: Finding Areas54m
- 6. Introduction to Taxes1h 25m
- 7. Externalities1h 3m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. Introducing Economic Concepts49m
- Introducing Concepts - Business Cycle7m
- Introducing Concepts - Nominal GDP and Real GDP12m
- Introducing Concepts - Unemployment and Inflation3m
- Introducing Concepts - Economic Growth6m
- Introducing Concepts - Savings and Investment5m
- Introducing Concepts - Trade Deficit and Surplus6m
- Introducing Concepts - Monetary Policy and Fiscal Policy7m
- 11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)1h 37m
- Calculating GDP11m
- Detailed Explanation of GDP Components9m
- Value Added Method for Measuring GDP1m
- Nominal GDP and Real GDP22m
- Shortcomings of GDP8m
- Calculating GDP Using the Income Approach10m
- Other Measures of Total Production and Total Income5m
- Consumer Price Index (CPI)13m
- Using CPI to Adjust for Inflation7m
- Problems with the Consumer Price Index (CPI)6m
- 12. Unemployment and Inflation1h 22m
- Labor Force and Unemployment9m
- Types of Unemployment12m
- Labor Unions and Collective Bargaining6m
- Unemployment: Minimum Wage Laws and Efficiency Wages7m
- Unemployment Trends7m
- Nominal Interest, Real Interest, and the Fisher Equation10m
- Nominal Income and Real Income12m
- Who is Affected by Inflation?5m
- Demand-Pull and Cost-Push Inflation6m
- Costs of Inflation: Shoe-leather Costs and Menu Costs4m
- 13. Productivity and Economic Growth1h 17m
- 14. The Financial System1h 37m
- 15. Income and Consumption52m
- 16. Deriving the Aggregate Expenditures Model1h 22m
- 17. Aggregate Demand and Aggregate Supply Analysis1h 18m
- 18. The Monetary System1h 1m
- The Functions of Money; The Kinds of Money8m
- Defining the Money Supply: M1 and M24m
- Required Reserves and the Deposit Multiplier8m
- Introduction to the Federal Reserve8m
- The Federal Reserve and the Money Supply11m
- History of the US Banking System9m
- The Financial Crisis of 2007-2009 (The Great Recession)10m
- 19. Monetary Policy1h 32m
- 20. Fiscal Policy1h 0m
- 21. Revisiting Inflation, Unemployment, and Policy46m
- 22. Balance of Payments30m
- 23. Exchange Rates1h 16m
- Exchange Rates: Introduction14m
- Exchange Rates: Nominal and Real13m
- Exchange Rates: Equilibrium6m
- Exchange Rates: Shifts in Supply and Demand11m
- Exchange Rates and Net Exports6m
- Exchange Rates: Fixed, Flexible, and Managed Float5m
- Exchange Rates: Purchasing Power Parity7m
- The Gold Standard4m
- The Bretton Woods System6m
- 24. Macroeconomic Schools of Thought40m
- 25. Dynamic AD/AS Model35m
- 26. Special Topics11m
11. Gross Domestic Product (GDP) and Consumer Price Index (CPI)
Consumer Price Index (CPI)
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