1. CIA4U0 Analyzing Current Economic Issues
Chapter 9: An Introduction to Macroeconomics
Topic 4: Measuring Price Stability: The Consumer Price Index (CPI) P

2. Consumer Price Index Topic Overview
Introduction
Calculating the CPI
Using the CPI
Limitations of the CPI
Real GDP

3. Consumer Price Index Introduction
One main goal of the federal government is to maintain price stability
Good for business, good for people, good for trade
If prices go up but income stays the same "real income" goes down
Inflation-the persistent rise in the general level of prices

4. Consumer Price Index Calculating the CPI
Also calculated by StatsCan
Monitors the consumption of over 600 goods and services and their prices
Done in cities across Canada
There are eight categories from Shelter to Personal Care
Categories are weighted according to their relative importance
A formula is used to calculate the CPI-what the basket of 600 goods and services "costs"

5. Consumer Price Index Using the CPI
Main purpose is to calculate inflation (I) from one period to another
I = (CPI2-CPI1)/CPI1 x 100
Used to manage pension plans (need to know how much to save up for)
Used in contract negotiation to determine pay increases
Indexing-connecting pay or pension increases to increases in the CPI

6. Consumer Price Index Limitations of the CPI
Not every household fits the picture created by the "averages"
Amount of spending
Goods and services purchased
Size of household/Culture
Products and purchases change over time
The "basket" needs to be updated periodically
Sometimes can't compare year to year

7. Consumer Price Index Real GDP
Nominal GDP is based on the total of what we spend
If we spend more than we did last year, how much of that is due to increased spending or just paying more for products because of inflation?
Real GDP is calculated using the CPI and takes out any effect that inflation has on measuring GDP growth

8. Consumer Price Index Real GDP
Example:
Year 1-buy $100 worth of chocolate
Year 2-buy $110 worth of chocolate
10% increase in Nominal GDP (chocolate)
CPI is 4%
So Real GDP = Nominal GDP – CPI = 6%
(Real process is much more complicated)