# Essay on Explain how the CPI is calculated

703 WordsFeb 9, 20153 Pages
Explain how the CPI is calculated (6) CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The basket of goods is a price survey that is taken from 10,000 households across the UK. The households are asked to record what they buy for two weeks and from this the 699 most occurring goods from all households are price checked from varying places across the UK and then are placed into the basket of goods. The goods are weighted according to their importance i.e. petrol would be more important than CDs and would therefore be more…show more content…
A reduction in household’s real income would cause a lower purchasing power of income for the households. This would mean that they could afford fewer goods and services which they may need. For example, they may no longer be able to afford a lot of petrol to commute long distances as they no longer have the purchasing power to buy said petrol. Another impact of a reduction in household’s income on the standard of living in the UK is that consumers may save more as fearful about the future. They may feel that is safer to have more money saved up in case things get worse, however, this would again mean that there would be a lower consumption of goods and services between all households which again, could affect the standard of living for households in the UK. In conclusion, in the short run of things a fall in household’s real income would mean a decrease in purchasing power causing less goods and services to be consumed overall. In the long run, households may feel it is safer to save up for the future rather than using the income they have by spending it on goods and services. These could both affect the standard of living in the UK as households may no longer be able to afford goods or services that are or used to be essential to daily life in the UK. For example, they may no longer be able to afford treats like chocolate or takeaways at the weekend which might have been part of routine in the past. Also the magnitude