which of the following statements concerning price indexes is not accurate?
a. Price indexes produce an average of prices that economists can compare to earlier averages.
b. Price indexes assist consumers and businesses in making economic decisions.
c. Price indexes assist the government in making policy decisions.
d. Price indexes define the cost of goods in the entire economy at a given point in time.
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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?
