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EC102-6SPRING09b

# EC102-6SPRING09b - 6-1Chapter 6 Measuring the Cost of...

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Unformatted text preview: 6-1Chapter 6: Measuring the Cost of LivingoInflation Is a rise in the overall level of pricesoDeflation A fall in the overall level of pricesoDisinflation A decrease in the rate of inflation6-26-34 steps to constructing a price index: Fix the Basket (the basket never changes)Fid the PricesCompute the Basket’s CostChoose a base year and compute the indexNext:Compute the inflation rateCalculation of a Price IndexConsumer Price Index =Cost of a fixed basket in current yearCost of a fixed basket in base yearMacroland example:1990 base year1991QuantityPriceQuantityPriceMilk(bags)160\$1.10150\$1.20Compact Discs(#)5\$15.0010\$16.006-4Calculate the consumer price index:Cost of basket in base year (1990): Pmilk1990(Qmilk1990) + PCD1990(QCD1990)1.10(160) + 15.00(5) = 251Cost of basket in the current year (1991): Pmilk1991(Qmilk1990) + PCD1991(QCD1990)1.20(160) + 16.00(5) = 272oCPI19916-5CPI = Cost of a fixed basket in current year = 1.083665 Cost of a fixed basket in base yearInflation:Measured by the percent change in the CPIFormula for Percentage Change:Final Value – Initial Value X 100 Initial Value6-6Example:...
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EC102-6SPRING09b - 6-1Chapter 6 Measuring the Cost of...

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