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1、Measuring the Cost of Living, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,1,The Consu
2、mer Price Index,Consumer price index (CPI) Measure of the overall level of prices Measure of the overall cost of goods and services Bought by a typical consumer Bureau of Labor Statistics, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, exc
3、ept for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,2,Calculating CPI,Fix the basket Which prices are most important to the typical consumer Different weight Find the prices At each point in time Compute
4、the baskets cost Same basket of goods Isolate the effects of price changes, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-pr
5、otected website for classroom use.,3,Calculating CPI,Chose a base year and compute the CPI Base year = benchmark Price of basket of goods and services in current year Divided by price of basket in base year Times 100 Compute the inflation rate, 2015 Cengage Learning. All Rights Reserved. May not be
6、copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,4,Table 1, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated
7、, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,Calculating the Consumer Price Index and the Inflation Rate: An Example,This table shows how to calculate the consumer price i
8、ndex and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and hamburgers.,5,Table 1, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain produ
9、ct or service or otherwise on a password-protected website for classroom use.,Calculating the Consumer Price Index and the Inflation Rate: An Example,This table shows how to calculate the consumer price index and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and
10、hamburgers.,6,The Consumer Price Index,Inflation rate Percentage change in the price index From the preceding period Producer price index, PPI Measure of the cost of a basket of goods and services bought by firms Changes in PPI are often thought to be useful in predicting changes in CPI, 2015 Cengag
11、e Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,7,Figure 1, 2015 Cengage Learning. All Rights Reserv
12、ed. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,The Typical Basket of Goods and Services,This figure shows how the typical consum
13、er divides spending among various categories of goods and services. The Bureau of Labor Statistics calls each percentage the “relative importance” of the category.,8,The Consumer Price Index,Problems in measuring the cost of living Substitution bias Prices do not change proportionately Consumers sub
14、stitute toward goods that have become relatively less expensive Introduction of new goods More variety of goods Unmeasured quality change Changes in quality, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a l
15、icense distributed with a certain product or service or otherwise on a password-protected website for classroom use.,9,GDP deflator versus CPI,GDP deflator Ratio of nominal GDP to real GDP Reflects prices of all goods & services produced domestically CPI Reflects prices of goods & services bought by
16、 consumers, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,10,“The price may seem a little high, but you have to remember thats in todays dollars.”,GDP deflator versus CPI,GDP deflator Compares the price of currently produced goods and services To the price of the same good
