1. The Consumer Price Index and Government Statistics
Basic Practice of Statistics - 3rd Edition
CHAPTER 16
The Consumer Price Index and Government Statistics
STATISTICS
CONCEPTS AND CONTROVERSIES
Eighth Edition
David S. Moore, William I. Notz
Lecture Presentation
Chapter 5

2. Chapter 16 Concepts Index Numbers Fixed Market Basket Price Indexes
Using the CPI
Understanding the CPI
The Place of Government Statistics
The Question of Social Statistics

3. Index Numbers
The Consumer Price Index (CPI) is a new kind of numerical description, an index number.
An index number describes the percentage change of a quantitative variable from a base period.
Index Number
An index number measures the value of a variable relative to its value at a base period. To find the index number for any value of the variable:

4. Index Numbers
An index number just gives the current value as a percentage of the base value. Index number means 323.9% of the base value, or a 223.9% increase from the base value.

5. Fixed Market Basket Price Indexes
The term “index number” usually means more than a measure of change relative to a base. It also tells us the kind of variable whose change we measure. That variable is a weighted average of several quantities, with fixed weights.
We call the collection of goods and services whose total cost we follow a market basket. The index number is then a fixed market basket price index.
Fixed Market Basket Price Index
A fixed market basket price index is an index number for the total cost of a fixed collection of goods and services.

6. Fixed Market Basket Price Indexes

7. Using the CPI
Think of the CPI as an index number for the cost of everything that American consumers buy.
An index number for “the cost of everything” lets us compare dollar amounts from different years by converting all the amounts into dollars of the same year.

8. Using the CPI In general, the 20th century was a time of inflation.
It would be foolish to think about dollars without adjusting for their decline in buying power.
Here is the recipe for converting dollars of one year into dollars of another year.
Adjusting for Changes in Buying Power
To convert an amount in dollars at time A to the amount with the same buying power at time B:

9. Using the CPI
Note, the 2011 median salary was $1,100,000!

10. Using the CPI
The real earnings decreased by 21%.

11. Understanding the CPI
The idea of the CPI is that it is an index number for the cost of everything American consumers buy. That idea needs lots of adjusting to be practical. Much of the fiddling uses the results of large sample surveys.
Who is covered? Represents the purchases of people living in urban areas (covers about 80% of U.S. population)
How is the market basket chosen? Market basket (goods and services) determined by Consumer Expenditure Survey (30,000 households) (updated regularly to adjust for buying habits, so is not actually a “fixed” market basket)
How are prices determined? Prices determined by surveys (80,000 prices in 85 cities at a representative sample of stores)
Does CPI measure changes in the cost of living? Does NOT measure changes in the cost of living (measures the “cost of living the same” over time)

12. The Place of Government Statistics
Modern nations run on statistics. Economic data, in particular, guide government policy and inform the decisions of private business and individuals.
Citizens need data that are accurate and timely and that keep up with changes in society and the economy.
Freedom from political influence is as important to government statistics as accuracy and timeliness.

13. The Question of Social Statistics
National economic statistics are well established with the government, the media, and the public. The government also produces many data on social issues such as education, health, housing, and crime.
Social statistics are less complete than economic statistics.
Social data help us understand our society and address its problems but are not needed for short-term management.

14. Chapter 16 Concepts Index Numbers Fixed Market Basket Price Indexes
Using the CPI
Understanding the CPI
The Place of Government Statistics
The Question of Social Statistics