Final answer:
The market basket for calculating the CPI includes typical goods and services from a wide variety of markets, representing average household expenditure based on the Consumer Expenditure Survey.
Step-by-step explanation:
The market basket used to calculate the Consumer Price Index (CPI) consists of typical goods and services from a wide variety of markets. This market basket is a hypothetical group of different items, with specified quantities of each, designed to represent the typical set of consumer purchases. The U.S. Bureau of Labor Statistics determines this basket based on the Consumer Expenditure Survey, which collects detailed spending habits from a national sample of households. By doing so, the CPI reflects the spending patterns of the average household, including expenses across eight major categories such as food and beverages, housing, and more.
Government statisticians then compute the CPI by tracking the prices of approximately 80,000 individual products that fall under these categories. They use weights, which account for the quantities purchased and factors such as substitution between goods and improvements in quality, to combine the price data into indices for the 200 or so overall items. Finally, these item price indices are aggregated into an overall Consumer Price Index, showing how the price level changes over time.