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ECON 20B (45)
Chapter 24

MacroEconomics Ch.24.docx

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Department
Economics
Course
ECON 20B
Professor
Mu- Chun Chen
Semester
Summer

Description
Ch. 24: Measuring the cost of living A. Consumer Price Index (CPI) 1. How CPI is calculated: - fix the basket - find the prices - compute basket’s costs - choose base year and compute index - equation: CPI = (price of basket of goods and services of current year/ price of basket in base year) x 100 - compute inflation rate - inflation rate: % change in price index from preceding period - equation: inflation rate year 2 = (CPI in year 2 – year 1/ cpi year 1) x 100 - determine how fast cost of living is rising producer price index: measure cost of basket of goods and services bought by firms 2. Problems measuring CPI - substitution bias - introduction of new goods - unmeasured quality change 3. GDP deflator VS. CPI - deflator reflects prices produced domestically - CPI reflects prices bought by customers - CPI compares price of fixed basket to base year
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