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ECN 204 (282)
Chapter 6

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ECN 204
Christos Shiamptanis

Chapter 6 Measuring the Cost of LivingConsumer price index turning dollar figures into meaningful measure of purchasing power o Used to monitor changes in the cost of living over time o Consumer price index rises a family has to spend more dollars to maintain the same standard of livingInflation a situation in which the economys overall price level is risingInflation rate percentage change in the price level from previous period The Consumer Price IndexConsumer Price Index CPI measure of the overall cost of the goods and services bought by a typical consumerEach month it is reported How the Consumer Price Index is CalculatedUse data on the prices of over 600 different goods and servicesSteps o Determine basketWhich prices are most import to the typical consumerEg buy more hot dogs than hamburgers price of hot dogs is more important given a greater weightTo know this give surveys o Find the pricesFind the prices of each of the goods and services in the basket for each point in time o Compute the baskets costOnly prices in calculation changeBasket is kept the same isolating effect o price changes from the effect and any quantity changes that might be occurring at the same timeMultiply cost of the one item and then by how many items there areThen add all the items you have computedYou do this for every single year o Choose a base year and compute the indexesBase yearbenchmarkYear that others are compared toEach year take the total basket of goods computed then divide by base year and then multiply by 100This is the CPICPI is always 100 in base year
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