ECN 204 Chapter 6: Chapter 6 - Measuring the Cost of Living
Document Summary
The basis of cost of living adjustments (colas) in many contracts and in social security. How the cpi is calculated: determine the basket. Statistics canada surveys consumers to determine what"s in the typical consumer"s shopping basket : find the prices. Statistics canada collects data on the prices of all the goods in the basket: compute the basket"s cost. Use the data on prices to compute the total cost of the basket: choose a base year and compute the index. 100 x cost of basket in current year / cost of basket in base year: compute the inflation rate. The percentage change in the cpi from the preceding period. Inflation rate = cpi this year cpi last year / cpi last year x 100% Over time, some prices rise faster than others. Consumers substitute toward goods that become relatively cheaper. The cpi misses this substitution because it uses a fixed basket of goods.
