How to compute real income or real value of a given currency?

Question:

I have a basic layperson's understanding of real income. My understanding is that it uses certain necessary or commonly desired goods and services, such as bread, rent, etc., to quantify the buying power of a dollar, for example. How much rent can you pay with one dollar, how many eggs, etc. This should account for inflation (or deflation). But I am wondering whether the goods and services change over time as some become obsolete. I could imagine, for example, heating coal being an important factor 100 years ago, but irrelevant today. There could be drastic rises or drops in the price of heating coal that don't generally affect the real value of a currency. Do the goods and services taken into account for real income get updated? If so, how does that occur.

Answer:

The calculation of real income involves regularly updating the basket of goods and services to ensure it remains relevant and accurate. This process is primarily guided by data collected through the Bureau of Labor Statistics' (BLS) Consumer Expenditure Surveys, which provide insight into consumer spending habits and the quantities of goods and services purchased. Historically, the basket used for the Consumer Price Index (CPI) was updated every ten years, but since 2002, updates have occurred biennially. As of 2023, these updates are now conducted annually, allowing the CPI to more accurately reflect recent changes in consumer behavior. The basket includes new products and services as they become significant in consumer spending, while outdated items are removed to stay current with market conditions. Additionally, quality adjustments are made to account for changes in the quality of goods and services, ensuring that price changes reflect actual inflation rather than improvements or declines in product quality. These efforts ensure that real income measurements accurately reflect the current cost of living and purchasing power, adapting to ongoing changes in the economy and consumer behavior.

References

1. Consumer Price Index Frequently Asked Questions - U.S. Bureau of Labor Statistics
2. 2022 CPI Weight Update Information - U.S. Bureau of Labor Statistics
3. Weight (wait) up! Increasing the Relevance of Consumer Price Index Weights - U.S. Bureau of Labor Statistics
4. Consumer Price Index: What It Is and How It's Used - Investopedia