Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Basket of Goods

What it is:

In economics, a basket of goods is a group of items used for price comparisons or other analytical purposes.

How it works (Example):

The consumer price index (CPI) is the most common measure of price levels. The CPI measures the change in the retail prices of approximately 80,000 specific goods and services -- the basket of goods. An example of a specific good in a basket of goods could be a 4.4-pound bag of "extra-fancy"-grade Golden Delicious apples to represent the "Apples" category. The goods and services in a basket of goods fall into eight major categories: food and beverage, housing, apparel, transportation, medical care, education and communication, recreation and other. The BLS updates the basket of goods every few years to remove obsolete items.

To get the data, Bureau of Labor Statistics (BLS) economic assistants call or visit approximately 23,000 stores and contact approximately 50,000 landlords or tenants in 87 urban areas every month to get prices on the items in the basket. Commodity specialists review the information and make adjustments for changes in size or quality of the product. The BLS then compares the cost of the basket to the same basket in the starting year (usually 1982-1984).

Why it Matters:

In economics, the price of a basket of goods is very telling. It can indicate the level of inflation and thus affect the monetary and fiscal policies of governments. The prices of the items in a basket of goods also directly or indirectly affect nearly every financial decision, from consumer choices to lending rates, from asset allocation to stock prices, and from accounting methods to contract language.

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