Class Notes - 10-1-07

Class Notes - 10-1-07 - Macroeconomics Class Notes...

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Macroeconomics – Class Notes – 10/1/07 CHAPTER #11 – MEASURING THE COST OF LIVING (con’t) Problems of CPI - CPI overstates rise in cost of living (by approximately 1%) - This measurement error overstates true cost of living. o Substitutions biased – overstates inflation because some people might be buying other goods. - Changes in quality o Quality could decrease or increase o Quality of present day good could far exceed the quality of past The Consumer Price Index versus the GDP Deflator - The CPI: o Only consumer goods o Includes cost of imports o Fixed market basket Weights of baskets are fixed - The GDP Price Deflator: o All final goods and services o Excludes imports o Uses current bundle of goods Uses each year’s output based on a base year o GDP deflator uses a price index Correcting for Inflation * Price indexes help adjusting $ figures for inflation * $ figures automatically corrected for inflation are indexed for inflation * (E.g) Cost of Living Adjustments (
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Class Notes - 10-1-07 - Macroeconomics Class Notes...

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