How the CPI is Calculated?
Assume that there are only three goods (instead of goods and services in over 200 categories in the actual calculation) included in the typical consumer’s purchases and, in the base or the original year, the goods had prices of $10, $20, and $30. The typical consumer purchased ten of each good. Total cost of this “market basket” in the base year was $600. In the current year, the three goods’ prices are $11, $24, and $33. Consumers now purchase 12, 8, and 11 of each good. The total current price of this “market basket” is $622, but this would not be an accurate way to compare the “price level.” An accurate comparison has to assume a constant pattern of purchasing. The determination of the CPI for the current year uses the quantities purchased in the market basket in the base year (ten of each good) times their prices in the current year divided by the quantities purchased in the market basket in the base year times their prices in the base year. Thus [(10 x $11) + (10 x $24) + (10 x $3
