What is the Consumer Price Index (CPI) used to measure?

What is the Consumer Price Index (CPI) used to measure?

• A. Prices of foreign goods only
• B. Geometric weighted average of prices for a basket of goods and services
• C. Arithmetical average of household expenses
• D. Only housing prices in the UK

Answer: (B)

The Consumer Price Index (CPI) is fundamentally used to measure inflation by tracking the changes in prices of a specific set of goods and services over time, representing the average household's consumption. It provides a geometric weighted average of prices for a carefully selected basket of goods and services. This basket typically includes items that consumers frequently purchase, allowing for the monitoring of the cost of living and economic well-being. The CPI's methodology involves weighting the prices of different items based on their importance or share of the average consumer's expenditure. This approach ensures that more significant components of consumer spending have a more substantial influence on the index. As the prices of these items fluctuate, the CPI reflects those changes, offering valuable insights into inflation trends and purchasing power. In contrast, the other options do not accurately describe the CPI. Focusing solely on foreign goods, household expenses, or only housing prices does not capture the comprehensive nature of the index, which encompasses a wide array of consumer items indicative of overall economic conditions.

The Consumer Price Index (CPI) is fundamentally used to measure inflation by tracking the changes in prices of a specific set of goods and services over time, representing the average household's consumption. It provides a geometric weighted average of prices for a carefully selected basket of goods and services. This basket typically includes items that consumers frequently purchase, allowing for the monitoring of the cost of living and economic well-being.

The CPI's methodology involves weighting the prices of different items based on their importance or share of the average consumer's expenditure. This approach ensures that more significant components of consumer spending have a more substantial influence on the index. As the prices of these items fluctuate, the CPI reflects those changes, offering valuable insights into inflation trends and purchasing power.

In contrast, the other options do not accurately describe the CPI. Focusing solely on foreign goods, household expenses, or only housing prices does not capture the comprehensive nature of the index, which encompasses a wide array of consumer items indicative of overall economic conditions.