What is the OECD?

Think of a country club for rich countries. The Organisation for Economic Co-operation and Development, based in Paris, France, groups together the world's rich-country economies. In addition to providing statistics and documenting all aspects of the member countries' economies, the OECD serves as a forum for discussion and coordination of economic policy. It includes the United States, Canada, Mexico, Japan, South Korea, Australia, New Zealand, and most of the European Union members, such as France, Germany, and Spain.

How is inflation determined around the world? Mainly, by using a basket of goods and services that represent the average citizen's daily needs. In some countries in the developing world, for example, more than 60 percent of the basket is made up of foodstuffs. In China it's 30 percent. And in the United States, only 10 percent, reflecting the fact that the average American consumer spends only about that much on food, and the rest on other goods and services. This means that increasing food prices have a much bigger effect on inflation in the developing world than in rich countries.

Since the basket of goods used to determine each country's inflation rate is defined by the country's government or government-controlled agency, there is the possibility for a certain amount of manipulation. For example, during inflationary times at the beginning of the 21st century, the Argentine government consistently understated the true inflation rate significantly by choosing goods and services that weren't rising as quickly as others. Other baskets of goods and services — for example, those used to compare currency values around the world, referred to as purchasing power parity — are determined by international organizations, banks, or even media outlets such as Web sites, magazines, or newspapers.


What is the consumer price index?

Think of a basket or a shopping cart full of goods and services like orange juice and DVDs. The consumer price index (CPI), referred to as the retail price index in Britain, tracks the prices of a wide range of goods and services, including computers, milk, rent, and haircuts, in an attempt to get an idea of how much prices are increasing in the economy as a whole. This index is often used to readjust fixed incomes, such as pensions and social security payments. The CPI basket of goods and services is determined by each country and is usually not the same as the one used to determine purchasing power parity, which allows economists to compare currency values between countries.

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