3 Apr 2015

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Chapter 16 – The 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 category’s 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)