>> Economists use gross domestic
product to track output of goods

and services but
they also need a way

to summarize the
overall level of prices

in the economy even though
there's thousands of prices

to keep track of and all

of those prices are
changing at different rates.

Economists do that with
the consumer price index.

Remember that one way
to calculate real GDP is

by taking the prices of
all products from one year

and then multiplying
the quantities

of each product by those prices.

As the quantities of each
product changes from year

to year, the overall value
of production changes.

The consumer price index
uses similar variables

in a different way.

It chooses a fixed set of output

that represents what the typical
consumer buys called a "basket,"

then attracts the
cost of that basket

over time as the prices change.

As with GDP, we arbitrarily
declare a base year.

Then we divide the cost of
the basket in a different year

by the basket cost
in the base year.

We do that for every year.

Then we multiply
those ratios by 100.

That gives us a consumer price
index number for each year.

Once we have the consumer price
index, there are two cool things

that we can do with it.

First, we can measure how
quickly prices are rising

from one year to the next.

And second, we can take
a price from the past

and turn it into
today's dollars.

For example; the actual
US CPI went from 203

in 2007 to 212 in 2008.

Taking the change in that index

over the original 2007 value
tells us that prices rose 4.4%

between the two years.

Likewise, the actual
U.S. CPI went from 217

in 2010 to 235 in 2014.

Taking the change in that index

over the original
2010 value tells us

that prices rose 8.3%
over those 4 years.

We can also use the
CPI to convert prices

from the past into
today's dollars.

For example; the first Apple
Macintosh computers sold

for almost $2,500 when
they came out in 1984.

To turn that into
today's dollars,

take our CPI based today and
find the index number for 1984.

We divide the $2,495
price from 1984

by the consumer price
index number for 1984,

and then multiply it by 100.

This turns that old price
into today's dollars.

Doing that for the Mac shows

that it cost $5,500
in today's dollars.

Here's another example;
the average hourly wage

in the U.S. in 1995 was $11.50.

To turn that into
today's dollars,

we take our CPI based today and
find the index number for 1995.

Then we divide the 1995 wage by
the consumer price index number

for 1995, and then
multiply it by 100.

Doing that for the
average wage shows

that it was $17.53
in today's dollars.