Governments and financial organizations are constantly measuring trends in the economy to try to predict what will happen next. Predicting economic trends successfully can have a profound effect on whether or not a business will make a profit or lose money. People also depend upon predictions about the economy as they make decisions in their personal lives: Is this a good time to buy a car? Refinance your home? Take a new job? The answer may depend upon a prediction about interest rates or developments in the labor market. What information might people turn to for help in making such predictions? One source of information used to evaluate and predict the economy is the CPI, or Consumer Price Index.
In this lesson you will define CPI (Consumer Price Index) and describe how it measures inflation, and describe the effect of inflation on the economy. You will also describe and compare how the U.S. Government and the Federal Reserve Board use economic indicators such as the Consumer Price Index to predict developments in the economy and to make decisions.
You will read and analyze the information on a web site to answer a series of discussion questions.
Now access the CPI Calculator .
You should now estimate the current cost of a "Big Gulp" using the description found on the 7-Eleven web site (search under their products and services to find the "Big Gulp) and then use the CPI calculator to compare the cost of a Big Gulp now and in the year you were born.
Have the prices increased or decreased since the year they were born? Why the prices might have changed since you were born. To find out, access the Consumer Price Index Frequently Asked Questions page, located on the Bureau of Labor Statistics web site.
By completing this lesson, you will learn how the CPI is used to measure inflation and economic trends, and how these affect the decision-making process for government, businesses, and individuals.
The following questions will help to guide you along during your online learning experience, and could be used for a class discussion, a writing assignment, or on a discussion board; you can work individually or in a small group to find the answers and then share them with the rest of the class. Attention! You may also want to explore the following web sites for help in answering Question 8:
Select and go to a decade by scrolling the time bar. Then explore the technology innovation that were created during that decade.
Listen to the Real Audio file of the MarketPlace.org news broadcast of December 14, 2001 (begins at 7 min 45 sec) for help in answering Question 9. (Listen to the audio file by using the "Listen in RealAudio" link.)
What is the CPI? What does the CPI measure?
Why is it important to measure the economy? List at least three ways in which the CPI might affect your life.
What is the relationship between the CPI and inflation?
What is the difference between the CPI-U and the CPI-W?
Why do you think there are different indexes for the CPI-U and the CPI-W?
Give at least three reasons why the reported CPI might be different from your personal experience with prices.
List at least three limitations of the CPI.
List three factors that might cause the CPI to change.
- What is the significance of the change in the core CPI rate?