ECN 204 Chapter 6: Chapter 6 - Measuring the Cost of Living.docx

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Consumer price index: is a measure of the overall cost of the good and services bought by a typical consumer. Cpi = (price of basket of goods/services in current year)/price of basket in base year. Data of about more than 600 different goods and services. Inflation rate: the % change in the price index from the preceding period y. Inflation rate of year 2 = (cpi in year 2 cpi in year 1)/cpi in year 1. Core inflation: the measure of the underlying trend of inflation. The problems in measuring the cost of living. Introduction of new goods: when new goods are introduced, consumers have more variety to choose from and each dollar is worth more. Unmeasured quality change: if the quality decreases, the value of that product decreases, and if the quality rise, the value of the product increases. The gdp deflator versus the consumer price index.

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