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Chapter 20: Problem 4

(Related to the Don't Let This Happen to You on page 681 ) Briefly explain whether you agree with the following statement: "I don't believe the government price statistics. The CPI for 2016 was \(240,\) but I know that the inflation rate couldn't have been as high as 140 percent in \(2016 . "\)

Short Answer

Expert verified
The statement 'I don't believe the government price statistics. The CPI for 2016 was \(240,\) but I know that the inflation rate couldn't have been as high as 140 percent in \(2016\).' is baseless because it confuses the CPI with the inflation rate. They are two different measurements: the CPI measures the average change in prices consumers pay for a basket of goods and services, and the inflation rate measures the percentage change in the price level from one period to the next. A CPI of \(240\) does not imply the inflation rate was 140 percent in 2016.

Step by step solution

01

Clarify the meaning of Consumer Price Index (CPI)

The Consumer Price Index (CPI) is an index that measures the average change in prices over time that consumers pay for a basket of goods and services. It is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. So, a CPI of \(240\) does not mean that prices increased by 140 percent, rather it's a measure of the average price of consumer goods and services in relation to a certain base year.
02

Explain the inflation rate

Inflation rate measures the percentage change in the average level of prices over a period of time. It is not the same as the CPI. To calculate the inflation rate, we subtract the CPI of the initial year from the CPI of the final year, divide that by the CPI of the initial year, and then multiply the result by 100 to get a percentage.
03

Applying the concepts to the given statement

Given the statement: 'The CPI for 2016 was \(240,\) but I know that the inflation rate couldn't have been as high as 140 percent in \(2016\)'. Without further information, it is impossible to determine the inflation rate for the year 2016. We need the CPI for the previous year to calculate it. However, it can be concluded that the statement is based on a misunderstanding: interpreting the CPI as the inflation rate. If the CPI was 240 in 2016, it does not mean that the inflation rate was 140 percent. They are two different measurements.

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