chapter 6 - The Consumer Price Index (CPI) Measures the...

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1 CHAPTER 10 MEASURING A NATION’S INCOME 0 The Consumer Price Index (CPI) ± Measures the typical consumer’s cost of living. ± The basis of cost of living adjustments (COLAs) in many contracts and in Social Security. CHAPTER 10 MEASURING A NATION’S INCOME 1 How the CPI Is Calculated 1. Fix the “basket.” 2. Find the prices. 3. Compute the basket’s cost. CHAPTER 10 MEASURING A NATION’S INCOME 2 How the CPI Is Calculated 4. Choose a base year and compute the index. The CPI in any year equals 5. Compute the inflation rate. The percentage change in the CPI from the preceding period. 100 x cost of basket in current year cost of basket in base year CPI this year – CPI last year CPI last year inflation rate x 100% =
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2 CHAPTER 10 MEASURING A NATION’S INCOME 3 EXAMPLE basket: {4 pizzas, 10 lattes} $12 x 4 + $3 x 10 = $78 $11 x 4 + $2.5 x 10 = $69 $10 x 4 + $2 x 10 = $60 cost of basket $3.00 $2.50 $2.00 price of latte $12 2005 $11 2004 $10 2003 price of pizza year CHAPTER 10 MEASURING A NATION’S INCOME 4 Problems With the CPI: ± Substitution Bias ± Introduction of New Goods ± Unmeasured Quality Change CHAPTER 10
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This note was uploaded on 02/25/2008 for the course ECON 002 taught by Professor Mahalingam during the Fall '07 term at UC Riverside.

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chapter 6 - The Consumer Price Index (CPI) Measures the...

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