Should I spend my money now or save it for a rainy day?
Inflation- Comparing dollars from one time period to another
Example: your father earned $40000 in 1982. What is this salary worth in
CPI 1982 = 61.8
CPI 2012 = 116.3
CPI caluclations overstate the inflation rate
Indexing = Old Age Security; Canada Pension Plan transfer paymets; only
one is indexed not part of GDP
o If it is indexed it means that the payment increases when the inflation
Problems with CPI
There are 3 problems with CPI: (stem from the way we calculate it)
1. Substitution bias – ignores consumer substitution; overstates inflation
a. Knows that people will buy oj if its $3 or 20$
2. Introduction of new goods – CPI is based on a fix basket of goods and
services; overstates inflation
a. The way we fix the basket; refers mainly to computers, tvs, etc..
3. Unmeasured quality change – some prices changes reflect quality
improvements; overstates inflation
a. Car; in 1982 $4000 in 2012 $40000 not the same car major
If none of these problems existsed the inflation rate would be lower
Ex. For some racquet sports there have been increases in the size of racquets and
the methods and materials used fore making them have improved. What problem in
the construction of the CPI is this most relevant to?