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What is CPI?

30358 reads · Last updated: December 5, 2024

The Consumer Price Index (CPI) is an index that measures changes in prices paid by consumers for a basket of goods and services that may include transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The CPI is one of the main indicators used to measure inflation. Generally, inflation above 3% is considered noticeable, and above 5% as relatively severe. CPI is often an important reference indicator for market economic activities and governmental monetary policy.

Definition

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is expressed as a percentage change and is one of the primary indicators of inflation. Generally, inflation is defined as exceeding 3%, and more than 5% is considered severe inflation. CPI is often an important reference for market economic activities and government monetary policy.

Origin

The concept of the Consumer Price Index originated in the early 20th century, initially used to measure the cost of living for the working class. Over time, the use of CPI expanded to become a crucial tool for measuring price level changes in the overall economy. It plays a key role in economic policy-making in various countries.

Categories and Features

CPI is typically divided into the overall index and the core index. The overall index includes all consumer goods and services, while the core index excludes food and energy, which are subject to volatile price changes. The main feature of CPI is its ability to reflect changes in consumer purchasing power, aiding governments and businesses in formulating economic policies and business strategies.

Case Studies

During the 2008 financial crisis, the CPI in the United States significantly dropped, reflecting a contraction in economic activity and reduced demand. Conversely, in 2021, due to supply chain issues and surging demand, the U.S. CPI rose sharply, increasing inflationary pressures. Another example is Japan during the 'Lost Decade' of the 1990s, where the CPI remained low for an extended period, indicating economic stagnation and deflation risks.

Common Issues

Investors often misunderstand short-term fluctuations in CPI, assuming it directly reflects the health of the economy. In reality, CPI should be analyzed in conjunction with other economic indicators. Additionally, the components of CPI may vary by country and region, and investors should be aware of these differences.

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Porter Diamond

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Marginal Propensity To Consume

In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income.MPC is depicted by a consumption line, which is a sloped line created by plotting the change in consumption on the vertical "y" axis and the change in income on the horizontal "x" axis.

Marginal Propensity To Consume

In economics, the marginal propensity to consume (MPC) is defined as the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income.MPC is depicted by a consumption line, which is a sloped line created by plotting the change in consumption on the vertical "y" axis and the change in income on the horizontal "x" axis.

Frictional Unemployment

Frictional unemployment is a type of short-term unemployment that occurs when workers look for new employment or transition out of old jobs and into new ones. This temporary period of unemployment is the result of voluntary transitions within an economy. It stands in contrast with structural unemployment, which stems from economic shifts that make it difficult for workers to find work.Frictional unemployment can be evident in a growing, stable economy and is regarded as a part of natural unemployment, the minimum unemployment rate in an economy due to economic forces and the movement of labor.The frictional unemployment rate is calculated by dividing the workers actively looking for jobs by the total labor force. The workers actively looking for jobs are typically classified into three categories: workers who left their job, people returning to the workforce, and new entrants.

Frictional Unemployment

Frictional unemployment is a type of short-term unemployment that occurs when workers look for new employment or transition out of old jobs and into new ones. This temporary period of unemployment is the result of voluntary transitions within an economy. It stands in contrast with structural unemployment, which stems from economic shifts that make it difficult for workers to find work.Frictional unemployment can be evident in a growing, stable economy and is regarded as a part of natural unemployment, the minimum unemployment rate in an economy due to economic forces and the movement of labor.The frictional unemployment rate is calculated by dividing the workers actively looking for jobs by the total labor force. The workers actively looking for jobs are typically classified into three categories: workers who left their job, people returning to the workforce, and new entrants.

Lindahl Equilibrium

A Lindahl equilibrium is a state of equilibrium in a market for public goods. As with a competitive market equilibrium, the supply and demand for a particular public good are balanced. So are the cost and revenue required to produce the good.The equilibrium is achieved when people share their preferences for particular public goods and pay for them in amounts that are based on their preferences and match their demand.Public goods refer to products and services that are provided to all by a government and funded by citizens' taxes. Clean drinking water, city parks, interstate and intrastate infrastructures, education, and national security are examples of public goods.A Lindahl equilibrium requires the implementation of an effective Lindahl tax, first proposed by the Swedish economist Erik Lindahl.

Lindahl Equilibrium

A Lindahl equilibrium is a state of equilibrium in a market for public goods. As with a competitive market equilibrium, the supply and demand for a particular public good are balanced. So are the cost and revenue required to produce the good.The equilibrium is achieved when people share their preferences for particular public goods and pay for them in amounts that are based on their preferences and match their demand.Public goods refer to products and services that are provided to all by a government and funded by citizens' taxes. Clean drinking water, city parks, interstate and intrastate infrastructures, education, and national security are examples of public goods.A Lindahl equilibrium requires the implementation of an effective Lindahl tax, first proposed by the Swedish economist Erik Lindahl.

Labor Productivity

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Labor Productivity

Labor productivity measures the hourly output of a country's economy. Specifically, it charts the amount of real gross domestic product (GDP) produced by an hour of labor. Growth in labor productivity depends on three main factors: saving and investment in physical capital, new technology, and human capital.

Expansionary Policy

Expansionary policy is a form of macroeconomic policy that seeks to encourage economic growth by increasing aggregate demand. It can consist of either monetary policy or fiscal policy, or a combination of the two. It is part of the general policy prescription of Keynesian economics to be used during economic slowdowns and recessions in order to moderate the downside of economic cycles. Expansionary policy is also known as loose policy.

Expansionary Policy

Expansionary policy is a form of macroeconomic policy that seeks to encourage economic growth by increasing aggregate demand. It can consist of either monetary policy or fiscal policy, or a combination of the two. It is part of the general policy prescription of Keynesian economics to be used during economic slowdowns and recessions in order to moderate the downside of economic cycles. Expansionary policy is also known as loose policy.