8. The consumer price index, or CPI, measures the cost of living for a typical urban household by multiplying the price for each category of expenditure (housing, food, and so on) times a measure of the importance of that expenditure in the average consumer’s market basket and summing over all categories.

However, using data from the consumer price index, we can see that changes in the cost of living for different types of consumers can vary a great deal. Let’s compare the cost of living for a hypothetical retired person and a hypothetical college student. Let’s assume that the market basket of a retired person is allocated in the following way: 10% on housing, 15% on food, 5% on transportation, 60% on medical care, 0% on education, and 10% on recreation. The college student’s market basket is allocated as follows: 5% on housing, 15% on food, 20% on transportation, 0% on medical care, 40% on education, and 20% on recreation. The accompanying table shows the December 2009 CPI for each of the relevant categories.

Bread Cheese Pizza company company company Cost of inputs $0 $0 $50 (Bread)

35 (Cheese)

Wages 25 30 75 Value of output 100 60 200 Nominal GDP Real GDP

(billions of (billions of Population Year dollars) 2000 dollars) (thousands)

1960 $526.4 $2,501.8 180,671 1970 1,038.5 3,771.9 205,052 1980 2,789.5 5,161.7 227,726 1990 5,803.1 7,112.5 250,132 2000 9,817.0 9,817.0 282,388 2007 13,841.3 11,566.8 301,140 2008 2009 2010 English textbook $50 $55 $57 Math textbook 70 72 74 Economics textbook 80 90 100 CPI December 2009 Housing 215.5 Food 218.0 Transportation 188.3 Medical care 379.5 Education 128.9 Recreation 113.2