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ECN 204 (282)
Chapter 6

Chapter 6 - Measuring the Cost of Living.docx
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Department
Economics
Course
ECN 204
Professor
Christos Shiamptanis
Semester
Winter

Description
Chapter 6The Consumer Price IndexConsumer Price Index is a measure of the overall cost of the good and services bought by a typical consumerCPIPrice of basket of goodsservices in current yearPrice of basket in base yearData of about more than 600 different goods and servicesThere are 5 steps to determine the Consumer Price Index 1 Determine the basket which prices are most important to the typical consumer if people by more hotdog than burger therefore the price of hotdogs is more important than the price of burgers 2 Find the prices find what prices each product was sold for 3 Compute the basket cost Year 1 price of hotdogsof hotdogs soldYear 1 price of burgersof burgers sold 4 Choose a Base Year and compute the index 5 Find the Inflation rateInflation Rate thechange in the price index from the preceding period y Inflation Rate of Year 2CPI in Year 2CPI in Year 1CPI in Year 1Core Inflation the measure of the underlying trend of inflationTHE PROBLEMS IN MEASURING THE COST OF LIVINGCommodity substitution bias when prices change from one year to the next they do not all change proportionately equally o When there is a large decrease people buy more of that product and they also substitute goods that are cheaper to buy when the consumer index is calculated it assuming a fixed basket of goods and ignoring consumer substitution
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