Question

What is the purpose of price indexes?

Answer 1

Price indexes like the Consumer Price Index (CPI) are used to track the change in the cost of goods and services, indicating inflation and the buying power of money. The CPI provides a consistent reference point to measure real value changes, avoiding distortions from inflation or deflation.

Step-by-step explanation:

The purpose of price indexes is to measure and track the change in the cost of goods and services over time. Economists construct a price index, such as the Consumer Price Index (CPI), to assess the average price level and calculate inflation, which reflects the buying power of money. The CPI reports on the changes in the prices of a 'basket' of goods and services that are typically purchased by households.

Economists use index numbers to measure the price level because direct dollar values of goods do not account for inflation or deflation over time. Indexes like CPI provide a more accurate representation of the real value changes in the economy by using a fixed reference point. When the CPI does not serve its desired purpose, alternative indexes based on different baskets appropriate for special groups, geographic areas, or categories of goods are employed.

Answer 2

Price indexes like the Consumer Price Index are used to assess the changes in the price level of a set of goods and services over time, contributing to economic decision-making. They offer a standardized means of comparing prices across different time periods, which helps adjust wages, government benefits, and inform monetary policies.

Step-by-step explanation:

The primary purpose of price indexes is to measure changes in the price level of a market basket of consumer goods and services over time. Economists construct a price index such as the Consumer Price Index (CPI) to track the average change in prices over time from the perspective of consumers. The CPI reports inflation rates and the cost of living, which is crucial for economic decision-making. The Bureau of Labor Statistics, for example, provides experimental price indices for different demographics and geographic areas to tailor to the needs of specific groups or to address market variations.

Economists opt for index numbers to measure the price level instead of the dollar value of goods because prices can be influenced by inflation and may not reflect the true changes in value. Using index numbers, which standardize the price changes, allows a more consistent and accurate comparison over time. This is important for a number of financial decisions, including the adjustment of government benefits, wages, and macroeconomic policy planning.