Economics 1022A/B Chapter Notes - Chapter 22: Typewriter

37 views1 pages

lemonoyster494

26 Jan 2016

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

maroonwoodchuck8495771 and 39243 others unlocked

ECON 1022A/B Full Course Notes

Verified Note

27 documents

Document Summary

The biased cpi: new goods bias. If you want to compare the price level in 2014 with that in. 1970, you must somehow compare the price of a computer today with that of a typewriter in 1970. Because a pc is more expensive than a typewriter was, the arrival of the pc puts an upward bias into the cpi and its inflation rate. Car and many other goods get better every year. Part of the rise in the prices of these goods is a payment for improved quality and is not inflation. But the cpi counts the entire price rise as inflation and so overstates inflation: quality change bias, commodity substitution bias, outlet substitution bias. Changes in relative prices lead consumers to change the items they buy. For example, if the price of beef rises and the price of chicken remains unchanged, people buy more chicken and less beef.

Related Questions

The substitution bias in the consumer price index refers to the:

a. substitution by consumers toward new goods and away from old goods.

b. substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods.

c. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.

d. substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.

1. The peak of the business cycle

a. usually occurs when the natural rate of unemployment is equal to its actual rate.

b. is the point where an expansion ends and a recession begins

c. is the minimum level of nominal GDP.

2. The consumer price index (CPI) reflects

a. the median annual expenditures of a typical single family of four on consumer goods

b. the average price of all goods and services computed from the ratio of nominal GDP to real GDP.

c. the changes in the prices of goods and services typically purchased by consumers.

3. The Consumer Price Index is NOT used

a. to measure the average price level of all final goods and services produced

b. to compute the U.S. inflation rate.

c. to measure changes in the cost of living

4. Which of the following is true of a price index that uses a fixed market basket?

a. It excludes new goods and services

b. It accurately predicts the impact of rising prices when purchases are made at superstores.

c. It overstates the importance of items that fall in price.

5. A quality-change bias in the construction of the CPI arises because

a. big box stores that carry electronic goods routinely run sales to reduce their inventories before stocking new models.

b. consumers also shop at superstores or outlet stores

c. newer versions of a product might be more expensive but could also be better than the older version.

greydeer734

Suppose that the are two goods in the economy, Xylophones (X) and Yams (Y). In year t, consumers in the economy purchase 20 Xylophones at a price of $20 each and 100 Yams at a price of $2 each. In year t + 1, consumers in the economy purchase 18 Xylophones at a price of $30 each and 150 Yams at a price of $2.50 each.

1. Calculate the GDP deflator in years t and t + 1 with base year t. What is inflation according to this deflator? Show each step. (Hint: it will be helpful for you to first calculate nominal and real GDP in years t and t + 1. When you calculate real GDP, make sure that you use the appropriate base year).

2. Calculate the GDP deflator in years t and t + 1 with base year t + 1. What is inflation according to this deflator? Show each step. (Hint: you will need to calculate real GDP in years t and t + 1 using a different base year than you used in part 1. Once you calculate real GDP with the appropriate base year, you will follow the same steps that you did in part 1.)

3. Compare your answers to a and b above. Are they the same? If not, why not? How does chain-weighting address any potential difference?

4. Calculate the CPI in years t and t + 1, using year t as the base year.

5. Describe two ways in which the CPI differs from the GDP deflator.

6. There are several problems with using the CPI to calculate real GDP and measure growth. One of these problems is that the CPI does not account for changes in the quality of goods sold over time. A computer today is significantly more efficient than it was even just ten years ago, so even if the price of computers rise with inflation, you are getting significantly more computing power per dollar. How would this bias estimates of GDP growth and inflation?

Economics 1022A/B Chapter Notes - Chapter 22: Typewriter

ECON 1022A/B Full Course Notes

Document Summary

Get access

Related Documents

Economics 1022A/B Lecture Notes - Lecture 2: Real Income, Gdp Deflator

Economics 1022A/B Lecture Notes - Lecture 21: Gdp Deflator, Potential Output, Real Income

Economics 1022A/B Lecture Notes - Lecture 2: Income Approach, Xm Satellite Radio, Gdp Deflator

Related Questions