STAT 100 Chapter 16: Chapter 16.docx

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Chapter 16The Consumer Price Index and Government Statistics
Consumer Price Index (CPI) used to measure the changing buying power of a dollar
oIs an index number
Index numbers can be attached to any quantitative variable that we measure repeatedly over time
Index number – measures value of a variable relative to its value at a base period
oIndex number = (value/base value) x 100
oNeed to know base period to make sense of an index number (e.g. 1994 = 100 means
base period is 1994)
Index number also tells us the kind of variable whose change we measure
oVariable is a weighted average of several quantities, with fixed weights
oMarket basket – collection of goods and services whose total cost we follow
oFixed market basket price index – index number for the total cost of a fixed collection
of goods and services
Weight given to each component remains fixed over time
“constant dollars,” “real income,” or “real terms”  all dollar amounts represent the same buying
power even though they may describe different years
Adjusting for changes in buying power:
oConvert an amount in dollars at time A to the amount with the same buying power at time
B:
Dollars at time B = dollars at time A x (CPI at time B/ CPI at time A)
Understanding the CPI:
oWho is covered?
CPI market basket represents purchases of people living in urban areas
oHow is the market basket chosen?
Consumer Expenditure Survey gathers detailed data on spending of more than
30,000 households  Bureau of Labor Statistics (BLS) breaks spending into
categories such as “fresh fruits and vegetables,” “new and used motor vehicles,”
and “hospital and related services”  choose specific items such as “fresh
oranges” to represent each group in market basket  items in market basket get
weights that represent their categorys proportion of all spending  weights, and
even specific market basket items, updated regularly to keep up with changing
buying habits
oHow are prices determined?
Sample surveys
BLS must discover price of “fresh oranges” every month
oDoes the CPI measure changes in the cost of living?
Measures cost of living the same over time
Doesn’t accurately measure changes in cost of living when economy itself is
changing
BLS has to keep its market basket up-to-date and compensate for changes in quality
CPI does not measure all changes in cost of our living (e.g. leaves out taxes)
odoesn’t factor changes in standard of living
modern nations run on statistics
oeconomic data guide government policy and inform decision of private business and
individuals
some countries have single statistical office (e.g. Statistics Canada) while others attach smaller
offices to various branches of government (e.g. United States with 72 federal statistical office)
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