EconomicsMacroeconomicsA-Level
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Price Index (CPI/RPI) Calculator

Index number comparing basket cost to a base period.

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Index

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Overview

A Price Index measures the relative change in price levels for a specific basket of goods and services over time compared to a base period. It serves as a primary macroeconomic indicator for quantifying inflation and adjusting nominal financial values into real terms.

Symbols

Variables

Index = Index, C = Current Basket Cost, B = Base Basket Cost

Index
Current Basket Cost
$
Base Basket Cost
$

Apply it well

When To Use

When to use: Use this formula when comparing the cost of a fixed market basket of goods across different time periods to identify trends in inflation or deflation. It is applied under the assumption that the quantity and quality of items in the basket remain constant between the base year and the current year.

Why it matters: This calculation is vital for central banks to set monetary policy and for governments to adjust social security benefits or tax brackets. It helps businesses and households evaluate changes in purchasing power, ensuring that wages and contracts accurately reflect the actual cost of living.

Avoid these traps

Common Mistakes

  • Using current cost in the denominator.

One free problem

Practice Problem

If a standardized basket of household goods cost 520, what is the current Price Index?

Base Basket Cost400 $
Current Basket Cost520 $

Solve for:

Hint: Divide the current cost by the base year cost and multiply the result by 100.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Britannica: Price index
  2. Wikipedia: Price index
  3. Mankiw, N. Gregory. Principles of Economics. 8th ed. Cengage Learning, 2018.
  4. Mankiw, N. Gregory. Principles of Economics. 9th ed. Cengage Learning, 2021.
  5. Mankiw, N. Gregory. Principles of Economics.
  6. Britannica, The Editors of Encyclopaedia. 'Consumer Price Index (CPI)'. Encyclopedia Britannica.
  7. Wikipedia: Consumer Price Index
  8. A-Level Economics — Inflation and Price Indices