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ECN 204 (281)
Chapter 6

Chapter 6

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Department
Economics
Course
ECN 204
Professor
Christos Shiamptanis
Semester
Winter

Description
ECN 204 Chapter 6Measuring the Cost of LivingTHE CONSUMER PRICE INDEXConsumer Price Index CPI A measure of the overall cost of the goods and services bought by a typical consumerHow the consumer price index is calculated1 Determine the basket Determine which prices are most important to the typical consumer 2 Find the prices Compute the price of each goodservice in the basket for each point in time3 Compute the baskets cost Calculate the cost of the basket of goodsservice at different times4 Choose a base year and compute the index Designate 1 year as the base year which is the benchmark against which other years are comparedCPIPrice of goodsservices in current yearPrice of basket in base year x 100Inflation rate the percentage change in the price index from the preceding periodInflation rate in a periodCPI in period 2CPI in period 1CPI in period 1 x 100Core Inflation the measure of the underlying trend of inflationProblems in Measuring the Cost of Living1 Commodity Substitution Bias Not all prices of goods change proportionately CPI uses fixed basket it ignores possibility of consumer substitution2 Introduction of new goods When new good is introduced more variety to choose from Greater variety makes each dollar more valuable so consumers need fewer dollars for sta
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