ECO 1102 Lecture Notes - Lecture 7: Market Basket, Gdp Deflator, Nominal Interest Rate

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Eco1102, chapter 6: measuring the cost of living. The consumer price index is used to monitor changes in the cost of living over time. When the consumer price index rises, the typical family has to spend more dollars to maintain the same standard of living. Economists use the term inflation to describe a situation in which the economy"s overall price level is rising. The inflation rate is the percentage change in the price level from the previous period. The consumer price index (cpi): the overall measure of the cost of the goods and services bought by a typical consumer. Every month, statistics canada computes and reports the cpi. To see how these statistics are constructed, a simple economy with two goods, hot dogs. It uses data on the prices of more than 600 different goods and services. and hamburgers, is used.

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Table 24-7. The table below applies to an economy with only two goods â hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs.

Year	Price of hamburgers	Price of hot dogs
2009	$5	$3
2010	5.50	3.30
2011	5.61	3.63

Refer to Table 24-7. Between 2009 and 2011, the cost of living increased by

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because

A. the CPI is calculated more often than the GDP deflator is.

B. the CPI is easier to measure.

C. the GDP deflator cannot be used to gauge inflation.

D. the CPI better reflects the goods and services bought by consumers.

A COLA automatically raises the wage when:

A. the consumer price index increases.

B. the producer price index increases.

C. taxes increase.

D. GDP increases.

Consider an economy that produces and consumes hot dogs and hamburgers. In the following table are data for two different years.

2010 2015
Good Quantity Price Quantity Price
Hot dogs 200 $2 250 $4

Hamburgers 200 $3 500 $4

a. Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as the CPI.

b. By what percentage did prices rise between 2010 and 2015? Give the answer for each good and also for the two measures of the overall price level. Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference.

silverant352

A. Bob and Carol are UIC students who buy hot dogs for lunch every day. The table shows their daily marginal benefit (MB) schedules for hot dogs, with marginal benefit measured as several dollars per hot dog. The price of a hot dog is $5. Bob and Carol each buy three hot dogs for lunch.

Hot Dog	Marginal Benefit
Hot Dog	Bob	Carol
First	25	30
Second	15	8
Third	6	4
Fourth	3	2

1. Compute Bob's consumer surplus. Make sure you state how consumer surplus is measured not just a number. Is Bob behaving rationally or irrationally? Explain your answer.

2. Compute Carol's consumer surplus. Make sure you state how consumer surplus is measured not just a number. Is Carol behaving rationally or irrationally? Explain your answer.

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ECO 1102 Lecture Notes - Lecture 7: Market Basket, Gdp Deflator, Nominal Interest Rate

ECO 1102 Full Course Notes

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