* The CPI is computed each year as the ratio of cost of a typical group of consumer goods and services today in comparison to the cost during a base period.
- Two sisters, Raheela and Sarah, have same preferences.
- Sarah began college in the year 1987 with a $500 discretionary budget.
- In the year 1997, Raheela started college and her parents promised her a budget which was equivalent in purchasing power. • Sarah' Expenditure
* The cost of living index represents cost of attaining a given level of utility at current prices relative to cost of attaining same utility at base prices.
* To do this on an economy basis would entail large amounts of information.
* Price indexes, such as the CPI, use a fixed consumption group in the base period. Known as Laspeyres price index.