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ECON 001 Lecture Notes - Lecture 16: French Wine, Real Interest Rate, Gdp Deflator

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apricotmoose462
12 Jun 2018
School
UC Merced
Department
Economics
Course
ECON 001
Professor
Jason Lee

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Chapter 24 Measuring Cost of Living
Q: How do we measure prices in an economy?
Main measure of prices is the Consumer Price Index (CPI)
A. Calculating CPI
1. Choose arbitrary base year
●Determine what basket of goods and services were purchased by a typical urban
household in that base year. This basket will be fixed.
●Agency collecting data is Bureau of Labor Statistics (BLS)
2. Find price of each good in fixed basket for every year.
●If value of fixed basket changes from one year to next, must be due to change in price.
3. Calculate CPI
●CPI for Year X= (cost of basket in year x/cost of fixed basket in base year) x 100
●A ratio has no units
4. Calculate Inflation Rate = (CPI1 - CPI0)/(CPI0) x 100
(ex)
year
Qjackets
Pjackets
Qbooks
Pbooks
2016
10
$40
30
$10
2017
12
$60
50
$12
CPI2016, CPI2017, Inflation Rate between 2016-2017
Fixed Basket= (10J and 30B)
Key Point: CPI for base year will always be equal to 100.
CPI2017= (cost of fixed basket in 2017/cost of fixed basket in 2016) x 100
Cost of fixed basket in 2016 (10J x 40) + (30B x 10)= $700
Cost of fixed basket in 2017 (10J x 60) + (30B x 12)= $960
(960/700) x 100 = 137.14
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Document Summary

Main measure of prices is the consumer price index (cpi: calculating cpi household in that base year. Find price of each good in fixed basket for every year. Determine what basket of goods and services were purchased by a typical urban. Agency collecting data is bureau of labor statistics (bls) If value of fixed basket changes from one year to next, must be due to change in price. Cpi for year x= (cost of basket in year x/cost of fixed basket in base year) x 100. Calculate inflation rate = (cpi1 - cpi0)/(cpi0) x 100 (ex) year. Key point: cpi for base year will always be equal to 100. Cpi2017= (cost of fixed basket in 2017/cost of fixed basket in 2016) x 100. Cost of fixed basket in 2016 (10j x 40) + (30b x 10)= . Cost of fixed basket in 2017 (10j x 60) + (30b x 12)= (960/700) x 100 = 137. 14.

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Related Questions

Three goods are consumed in an economy during years 1 and 2. The table shows prices (P1 and P2) for each good, and it shows the market basket that is used to calculate the consumer price index. The base year is year 1.

Good

P1

P2

Basket

Milk

(gallons)

$4

$4.20

4

Chicken

(pounds)

$5

$5.50

10

Onions

(bags)

$2

$2.32

1

Enter numbers in each blank, rounded to two decimal places as necessary. The cost of the basket in year 1 is $____ and the cost of the basket in year 2 is $_____. The value of the CPI in year 1 is _____ and the value of the CPI in year 2 is ______. The inflation rate is equal to ______%.

 

Calculating inflation using a simple price index:

Consider a fictional price index, the College Student Price Index (CSPI), based on a survey of annual purchases of a typical college student. Suppose the following table shows information on the market basket for the CSPI and the prices of each good in 2012, 2013, and 2014

 

Quantity

in basket

2012

2013

2014

Price($)     Cost of                         basket($)

Price($)      Cost of                       basket($)

Price($)    Cost of                     basket($)

Notebooks

10

5                 50

7

11

Calculators

        1

100             100

110

140

Large coffees

      150

1                 150

1

1

Energy drinks

       50

2                  100

3

4

Textbooks

       10

100              1000

120

150

Total cost

 

                    1400

 

 

Price index

                    100

 

 

The cost of each item in the basket and the total cost of the basket are shown for 2012.

Perform these same calculations for 2013 and 2014, and enter the results in the table.

Suppose the base year for this price index is 2012. Calculate and enter the value of the CSPI for the remaining years in the last row of the table. Between 2012 and 2013, the CSPI increased by..........

Between 2013 and 2014, the CSPl increased by..........

The US Bureau of Labor Statistics calculates inflation by taking samples of prices for a 'basket of goods and services' a 'typical consumer' would purchase. Each good and service is assigned a 'weight' or the percentage of income spent on that product. For example, 'cakes, cupcakes, and cookies' are given a weight of 0.197. This means that about 0.2% of the 'average' household spending is made on these items. Of course, an individual's spending may vary significantly from the hypothetical basket of goods and services. In this assignment, you will review the BLS's Relative importance of components in the Consumer Price Indexes and compare how your household spending measures up to the typical consumers.

Part I

Considering your household budget, divide up your spending into these eight broad categories:

Category CPI Weight Your Budget
Food and beverages 14.8  
Housing 41.5  
Apparel 3.6  
Transportation 17.3  
Medical Care 6.6  
Recreation 6.3  
Education & Communication 6.4  
Other 3.5  
Total 100 100

How closely does your household spending correlate to the typical consumer? How might your household be disproportionately affected by a change in one of these broad categories? Do you believe that the government's weightings are an accurate approximation for the whole economy?