# Understanding Consumer Price Index (CPI)

## What is the Consumer Price Index (CPI) and how is it calculated?

The Consumer Price Index (CPI) is a measure that tracks the average price change over time for a basket of goods and services, serving as an indicator of inflation and the cost of living in an economy. Can you calculate the CPI based on the given nominal GDP of $400 billion and real GDP of $320 billion?

## Calculating the Consumer Price Index (CPI)

The approximate CPI, based on the given nominal GDP of $400 billion and real GDP of $320 billion, is 125.

The Consumer Price Index (CPI) is a crucial economic indicator that helps in understanding the inflation rate and cost of living changes in an economy. It is calculated by taking the ratio of nominal GDP to real GDP and multiplying it by 100.

In this case, the nominal GDP was $400 billion and the real GDP was $320 billion. By substituting these values into the formula, we get the CPI as follows:

CPI = ($400 billion / $320 billion) * 100 = 125

Therefore, the approximate CPI in this scenario is 125, indicating a significant price change over time for the basket of goods and services in the economy.

Understanding the CPI is important for policymakers, economists, and consumers to make informed decisions regarding monetary and fiscal policies, investments, and everyday spending habits.