Inflation and Consumer Price Index: Understanding Economic Changes

This lecture discusses the concept of inflation and its calculation through the consumer price index (CPI). The instructor begins by explaining the significance of inflation in economic discussions, particularly in relation to consumer behavior and purchasing power. The lecture outlines how inflation is measured using a basket of goods and services, detailing the importance of price changes over time. The instructor introduces the mathematical aspects of calculating inflation, including the use of indices to represent price changes. The discussion progresses to the challenges of aggregating various goods and services into a single index, emphasizing the need for a representative consumer basket. The lecture also addresses the limitations of traditional CPI calculations, such as the impact of changing consumption habits and the quality of goods. Finally, the instructor highlights the implications of inflation on real income and economic growth, providing insights into how inflation affects purchasing power and overall economic activity.