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    CPI and a basket of goods

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    We hear all the time about inflation and this thing called the CPI...

    So, what is the CPI and a basket of goods?

    Would you expect the same salary to work in each of these different cities: Denver, San Francisco, New York or Portland?

    If not, please explain, think about the different things that you consume on a daily or weekly basis. To do this, pick 5 items that are common to each area, such as the price of gas, and create your own basket of goods and craft your initial response accordingly. Creativity counts here, so pick different items and demonstrate your understanding of the causes behind the differences.

    The textbook for the class is Essentials of Economics 6th edition By Mankiw

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    Solution Preview

    Step 1
    Consumer price index is a metric that calculates the price changes for each item in the predetermined basket of goods and averages them. The goods are assigned weights according to their importance. The CPI is used for identifying periods of inflation or deflation. The basket of goods is a fixed list of items used only to track inflation in the economy. In context of CPI, the basket is a list of consumer goods (c).

    Step 2
    I will not expect the same salary to work at Denver, Portland, San Francisco, and New York. The reason for this is that the level of inflation in each of these ...

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