ECN 204 Chapter 6: Chapter 6

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Ecn 204: chapter 6 -- measuring the cost of living. Consumer price index (cpi): a measure of the overall cost of the goods and servi ces bought by a typical consumer. Cpi = price of goods & services in current year / price of basket in base year x. Inflation rate: the percentage change in the price index from the preceding peri od. Inflation rate in a period = cpi in period 2 - cpi in period 1 / cpi in period 1 x 100. Core inflation: the measure of the underlying trend of inflation. Problems in measuring the cost of living: commodity substitution bias: not all prices of goods change proportionately. Cpi uses fixed basket, it ignores possibility of consumer substitution: introduction of new goods: when new good is introduced, more variety to choos e from. Greater variety makes each dollar more valuable, so consumers need fewer dollars for standard of living.

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