Class Notes (806,629)
Canada (492,363)
Economics (969)
ECON 102 (212)

6. Measuring the Cost of Living.docx

3 Pages
Unlock Document

University of Waterloo
ECON 102
Maryann Vaughan

Measuring the Cost of Living January-14-13 2:28 PM The CPI  Measures the typical consumer's cost of living  The basis of many COLAs in many contracts and in social security Calculating the CPI 1. Determine the basket.  Statscan surveys consumers to determine what is in the typical consumer's "shopping basket" 2. Find the prices  Statscan collects the data on teh prices of all the goods in the basket 3. Compute the basket's cost  Use the data on prices to compute the total cost of the basket 4. Choose a base year and compute the index  The CPI in any year is  5. Copute the inflation rate  The percentage change in the CPI from the preceding period  Problems with the CPI January-16-13 3:36 PM Commodity substitution bias  Over time, some prices rise faster than others  Consumers substitute towards goods that become relatively cheaper  The CPI misses this substitution because it uses a fixed basket of goods  Thus, the CPI overstates increases in the cost of living. Introduction of new goods The introduction of new goods increases variety, allows consumers to find products that more  closely match their needs  In effect, dollars become more valuable  The CPI misses this effect, because it uses a fixed basket of goods  Thus the CPI overstates increases in the cost of living. Unmeasured Quality Change  Improvements in the quality of the goods in the basket increase the value of the goods in the baskets  Statscan cannot account for all the quality chages  So the CPI overstates the cost of living Problems with the CPI  Each problem causes the CPI to overstate the cost of living icreases  Bank of Canada estimates that the CPI overestimates inflation by 0.6% per year  Things like pensions, income tax deductions, government social payments and private sector wage allowances ate adjusted upward using the CPI  The bias in the CPI suggests that wages may actually be higher than they need to be GDP Deflator vs the CPI January-16-13 4:03 PM  Economists and policy makers monitor both the GDP Deflator and the CPI to gauge how quickly prices are rising  There are 2 differences that make them diverge: 1. The GDP deflator reflects the prices of all goods and services produced domesticaly, while the CPI reflects the prices of all goods
More Less

Related notes for ECON 102

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.