Microeconomics,, 16th Canadian Edition

(Sean Pound) #1

in the typical consumer’s basket of goods and services. For example, since
the typical consumer spends a tiny fraction of income on sardines but a
much larger fraction of income on housing, the weight on the “sardines”
price index in the CPI is very small and the weight on the “housing” price
index is very large. The result is that even huge swings in the price of
sardines have negligible effects on the CPI, whereas much more modest
changes in the price of housing have noticeable effects on the CPI.

We will spend much more time discussing the Consumer Price Index
when we study macroeconomics beginning in Chapter 19. For now, keep
in mind the usefulness of the simple index numbers we have constructed
here. They allow us to compare the time paths of different variables.

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