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Unformatted text preview: Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics 1 Chapter 24 Measuring the Cost of Living 24.1 Introduction z We continue to learn additional key macroeconomic variables: ¡ Consumer price index (CPI) ¡ Nominal and real interest rat (Why important?) 24.2 The consumer price index z Definition of CPI: a measure of the overall cost of the goods and services purchased by a typical (or average) consumer. ¡ A single number for the overall level of prices. 24.2.1 How the consumer price index calculated z Step 1: Fix the basket ¡ Statistics authority sets weights on across individual goods and services, according to their degree of importance, by surveying consumers and finding the basket of goods and services that the typical consumer buys. z Step 2: Find the prices ¡ Find the prices of each of the goods and services in the basket for each point z Step 3: Compute the basket’s cost ¡ Calculate the cost of the basket of goods and services at different times z Step 4: Choose a base year and compute the index ¡ Designate one year as the base year (the benchmark against which other years are compared) Mankiw, Principles of Economics Prepared by Moon Young BAEK Yonsei University, Economics 2 z Step 5: Compute the inflation rate: ¡ Inflation is a situation in which the economy’s overall price level is rising. ¡ Inflation rate is the percentage change in the price level from the previous periods ¡ Inflation rate at period t : 24.2.2 Problems in measuring the cost of living z Three important problems with the CPI (mostly due to the nature of ` fixed ' basket of CPI): 1. Substitution bias : ¢ When prices change over time, consumers naturally respond to those...
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This note was uploaded on 04/05/2010 for the course ECONOMICS 2009 taught by Professor Lee during the Spring '09 term at Yonsei University.
- Spring '09
- Consumer Price Index (CPI)