Chapter 24: Measuring the Cost of Living

Chapter 24 introduces the concept of consumer price index. Consumer price index is used to measure the the overrall cost of the goods and services bought by a consumer. This chapter also talks about how the inflation rate, which is the percentage change in the price level from the previous period is important. Like always, there are flaws in using the CPI but it helps give an idea of how prices are changing over time. The producer price index is a measure of the cost of a basket of goods and services bought by a firm and it can help predict changes in the consumer price index. Another key concept in the chapter is the nominal interest rate. The nominal interest rate is as usually reported without a correction for the effects of inflation. The real interest rate is the interest rate corrected for the effects of inflation. Also, indexation is the automatic correction of a dollar amount for the effects of inflation by law or contract.