ECO 1102 Lecture 6: ~ Chapter 6- Measure the Cost of Living

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25 Feb 2016

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Consumer price index = used to monitor changes in cost of living over time. When consumer price index rises, typical household spend more dollars to maintain same standard of living. Economists use the term inflation to describe a situation in which economy"s overall price level is rising. Inflation rate = percentage change in price level from previous period. Consumer price index (cpi): overall measure of cost of goods & services bought by a typical consumer. Every month, statistics canada computes & reports cpi. Uses data on prices of more than 600 different goods & services. To see how these statistics are constructed, a simple economy w/ 2 goods (hotdogs & hamburgers) is used. Cpi= price of basket of goods/ services current year. Inflation rate year 2=cpi year 2 cpi year 1. 5 steps to compute inflation rate: determine basket, find prices, compute basket"s cost, choose a base year & compute index, compute inflation rate.

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Measures of Inflation The GDP deflator is the broadest, most inclusive measure of change in the country's price level since it includes all final goods and services produced and sold. But the GDP deflator is not used by the government or economists as the benchmark measure of inflation; instead, the consumer price index (CPI) is used to determine changes in the cost of living. What is the shortcoming of the GDP deflator as a measure of inflation for households, and why is the CPI considered to be a more useful measure?

greycoyote29

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.

1. The peak of the business cycle

a. usually occurs when the natural rate of unemployment is equal to its actual rate.

b. is the point where an expansion ends and a recession begins

c. is the minimum level of nominal GDP.

2. The consumer price index (CPI) reflects

a. the median annual expenditures of a typical single family of four on consumer goods

b. the average price of all goods and services computed from the ratio of nominal GDP to real GDP.

c. the changes in the prices of goods and services typically purchased by consumers.

3. The Consumer Price Index is NOT used

a. to measure the average price level of all final goods and services produced

b. to compute the U.S. inflation rate.

c. to measure changes in the cost of living

4. Which of the following is true of a price index that uses a fixed market basket?

a. It excludes new goods and services

b. It accurately predicts the impact of rising prices when purchases are made at superstores.

c. It overstates the importance of items that fall in price.

5. A quality-change bias in the construction of the CPI arises because

a. big box stores that carry electronic goods routinely run sales to reduce their inventories before stocking new models.

b. consumers also shop at superstores or outlet stores

c. newer versions of a product might be more expensive but could also be better than the older version.

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ECO 1102 Lecture 6: ~ Chapter 6- Measure the Cost of Living

ECO 1102 Full Course Notes

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