Consumer Price Index Flashcards, test questions and answers

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What is Consumer Price Index?

The Consumer Price Index (CPI) is an index used to measure the change in prices of goods and services over a period of time. It is often cited as an indicator of inflation, since it measures how much more expensive products have become relative to the same period in the prior year. The CPI can be calculated for any country or region, and provides a useful way to compare costs across different areas.The calculation of the CPI involves collecting price data on a variety of items from households throughout the region or country that is being studied. This data is then weighted according to their share in total household spending; this ensures that changes in prices for certain items will not unduly influence overall results. Once these weights are applied, economists calculate an index by taking into account both changes in prices and quantities purchased by consumers over time. From there, they can determine whether overall prices rose or fell during that period compared with the previous one, allowing them to see whether inflation has occurred or not.In addition to being used as an indicator of inflation, the CPI also serves other purposes such as setting minimum wages and adjusting taxes based on cost-of-living increases for citizens living within particular regions/countries. Businesses may also use it when making decisions about raising wages for employees or increasing production costs due to higher input prices associated with rising consumer demand levels observed within their target customer group(s). Economists and policymakers alike rely heavily upon this metric when evaluating economic performance trends over longer periods of time especially since it’s considered one of the most reliable gauges out there.