Basket of Goods - Explained
What is a Basket of Goods?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is a Basket of Goods?
To calculate the price level, economists begin with the concept of a basket of goods and services, consisting of the different items individuals, businesses, or organizations typically buy. The next step is to look at how the prices of those items change over time. In thinking about how to combine individual prices into an overall price level, many people find that their first impulse is to calculate the average of the prices. Such a calculation, however, could easily be misleading because some products matter more than others.
Changes in the prices of goods for which people spend a larger share of their incomes will matter more than changes in the prices of goods for which people spend a smaller share of their incomes. For example, an increase of 10% in the rental rate on housing matters more to most people than whether the price of carrots rises by 10%. To construct an overall measure of the price level, economists compute a weighted average of the prices of the items in the basket, where the weights are based on the actual quantities of goods and services people buy.
Related Topics
- Inflation
- Core Inflation
- Cost Push Inflation
- Demand Pull Inflation
- Wage Push Inflation
- Inflation Spiral (Wage-Price Spiral)
- Agflation
- Basket of Goods and Services
- Indexing and Index Number
- Base Year
- Consumer Price Index
- Substitution Bias
- Quality / New Goods Bias
- Core Inflation Index
- Producer Price Index
- International Price Index
- Employment Cost Index
- Buying Power Index
- Breakfast Index
- Employment Cost Index
- Producer Price Index
- Capital Goods Price Index
- Farm (Agricultural) Price Index
- Harmonized Index of Consumer Prices
- Repeated Sales Method (Real Estate)
- GDP Deflator
- Deflation
- Pigou Effect
- Hyperinflation (Economics)
- Biflation
- Inflation and Redistribution of Purchasing Power
- Inflation Blurs Price Signals
- Inflation Affects Long-Term Planning
- What are the Benefits of Inflation?
- Indexing and Index Number
- Cost of Living Allowance
- Adjustable Rate Mortgage