The Consumer Price Index (CPI) measures the cost of living by tracking the prices of goods and services in a typical consumer's basket. The CPI is used to calculate Cost of Living Adjustments and measure inflation. It is computed by collecting price data, choosing a base year, calculating the total cost of the basket in other years, and comparing to the base year. The real interest rate, corrected for inflation, is the nominal interest rate minus the inflation rate.

1. 1.CONSUMER PRICE INDEX
2.MARGINAL UTILITY

2.  measures the typical consumer’s cost of living
 the basis of cost of living adjustments
(COLAs) in many contracts and in Social
Security

3. 1. Fix the “basket.”
The Bureau of Labor Statistics (BLS) surveys
consumers to determine what’s in the typical
consumer’s “shopping basket.”
2. Find the prices.
The BLS collects data on the prices of all the
goods in the basket.
3. Compute the basket’s cost.
Use the prices to compute the total cost of
the basket.

4. MEASURINGTHECOST OF LIVING 4
4. Choose a base year and compute the index.
The CPI in any year equals
5. Compute the inflation rate.
The percentage change in the CPI from the
preceding period.
100 x
cost of basket in current year
cost of basket in base year
CPI this year – CPI last year
CPI last year
Inflation
rate
x 100%
=

5. MEASURINGTHECOST OF LIVING 5
basket: {4 pizzas, 10 shakes}
120 x 4 + 30 x 10 = 780
110 x 4 + 25 x 10 = 690
100 x 4 + 20 x 10 = 600
cost of basket
30
25
20
price of
shakes
120
2009
110
2008
100
2007
price of
pizza
year
Compute CPI in each year using
2007 base year
2007: 100 x (600/600) = 100
2008: 100 x (690/600) = 115
2009: 100 x (780/600) = 130
Inflation rate:
15%
115–100
100
x100%
=
13%
130–115
115
x100%
=

6.  The Consumer Price Index is a measure of the cost of
living. The CPI tracks the cost of the typical
consumer’s “basket” of goods & services.
 The CPI is used to make Cost of Living Adjustments
and to correct economic variables for the effects of
inflation.
 The real interest rate is corrected for inflation
and is computed by subtracting the inflation rate from
the nominal interest rate.
6

7.  The Consumer Price Index is a measure of the
cost of living. The CPI tracks the cost of the
typical consumer’s “basket” of goods &
services.
 The CPI is used to make Cost of Living
Adjustments and to correct economic
variables for the effects of inflation.
 The real interest rate is corrected for inflation
and is computed by subtracting the inflation
rate from the nominal interest rate.

8.  Utility
 The want-satisfying power of a good or service
 Utility Analysis
 The analysis of consumer decision making based on utility
maximization
 Util
 A representative unit by which utility is measured

9.  Marginal Utility
 The change in total utility due to a one-unit
change in the quantity of a good or service
consumed
Marginal utility =
Change in total utility
Change in number of units consumed

10.  Diminishing Marginal Utility
 The principle that as more of any good or service
is consumed, its extra benefit declines
 Increases in total utility from consumption of a
good or service become smaller and smaller as
more is consumed during a given time period.

11.  Suppose you are very hungry and offered a burger to eat.
The satisfaction which you derive from the first piece of
burger ,would be the maximum because intensity of your
hunger is more but eventually it goes on decreasing and
therefore the satisfaction that you derive from the other
bite goes on decreasing.