Problem : What does the CPI measure?
The CPI measures the cost of living based on the relative cost of a fixed based of goods and services consumed by a typical consumer in a country.Problem :
Using the figure above, compute the CPI for Country C in year 1 using year 1 as the base year.
CPI = ($0.50 + $1) / ($0.50 + $1) = 100Problem : Using figure 1, compute the CPI for Country C in year 2 using year 1 as the base year.
($1 + $2) / ($0.50 + $1) = 200Problem : What is the percent increase in the price level in Country C from year 1 to year 2?
Percent increase in CPI = (CPI2 - CPI1)Problem : What are 3 problems with CPI?
The 3 major problems with the CPI are its inability to deal with the substitution bias, the introduction of new items, and the changes in the quality of items over time.
