ECON 1000 Chapter Notes - Chapter 6: Gdp Deflator, Canada Pension Plan

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26 Mar 2017

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Chapter 6 - measuring the cost of living. Consumer price index (cpi: a measure of the overall cost of goods and services bought by a typical customer, cpi is used to monitor the cost of living over time. Determine what prices are more important to the typical customer. If the typical customer buys more of good 1 than good 2, the price of good 1 is given more weight in measuring the cost of living. Statistics canada sets these weights by surveying consumers to find out the basket of goods the typical consumer buys: find the prices. Find the prices of each of the goods and services in the basket for each point in time: compute the basket"s cost. Use data on prices to calculate the cost of the basket of goods and services at different times: choose a base year and compute the index.

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There are many different types of market baskets that economists measure. For example, the market basket for consumers called the 'Consumer Price Index' tracks the prices associated with the typical consumer's purchases of goods and services. The 'Producer Price Index' tracks the prices that firms receive when selling their goods and services.

Indicate the appropriate market basket to use in each of the following instances.

Consumer Price Index:

a)	Measuring differences in the cost of living between different cities.
b)	Examining price changes that might affect businesses.
c)	Measuring the cost of living for a typical consumer.

Producer Price Index:

A)	Measuring differences in the cost of living between different cities.
B)	Examining price changes that might affect businesses.
C)	Measuring the cost of living for a typical consumer.

amaranthbuffalo689

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.

greydeer734

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 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 consumer's.

Part I

Consider these specific categories:

Category	CPI Weight	Your Budget
Health Insurance	0.5
Jewelry	0.3
Household Cleaning Supplies	0.4
Gasoline	4.9
Food Away from Home	5.9

How closely does your household spending correlate to the typical consumer's? Is it realistic that the typical household spends about as much on health insurance as it does on cleaning supplies? Should the Bureau of Labor Statistics adjust its CPI weights after the new federal health care mandate starts? What might this mandate do to inflation? In an economic contraction, what would you expect to happen to spend in each of these categories, if health insurance is mandated?

azurecrow98

ECON 1000 Chapter Notes - Chapter 6: Gdp Deflator, Canada Pension Plan

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