Basket of goods definition
Group of items purchased by households and individuals used in the process of measuring price changes
What is Basket of goods?
The basket of goods represents the value of a specific group of products and services. Products included in the basket are necessities and everyday products used by individuals and households. The purpose of the basket is to enable easier tracking of changes in the price levels of these goods. Accordingly, the change indicates whether or not there is an increase in inflation. Moreover, the basket is also used for calculating the Consumer price index (CPI) or the cost of living.
Tracking the potential changes in the level of inflation enables policymakers to adapt the direction of the fiscal and monetary policy. Based on the economic conditions (inflation or deflation), the policymakers can decide to implement expansionary, contractionary, or neutral policy.
Basket of goods meaning
The basket includes a variety of products from different categories — food and beverages, clothing, housing, transportation, education, medical expenses, and other items. Each group of products has its own weight in the basket.
The basket of goods is analyzed annually to examine the price differences i.e., the value of basket of goods from the current and previous year. In addition, it should be adapted in accordance with the buying preferences of people. The reason is that consumers can change their spending habits from one period to another, and the basket of goods should reflect these new habits.
Basket of goods explained
Changes in the value of the basket of goods serve as the foundation for the calculation of inflation. A baseline, set by economists, serves as a starting point, a ground zero point, and the analysis includes changes from the baseline values. The baseline year is referred to as a reference base with a value of 100. Changes in the value of a basket of goods reflect changes in the CPI. For instance, if it is stated that CPI is 102, this would reflect inflation of 2 per cent.
The basket of goods is calculated for each market and country separately.