Principles of Economics- Mankiw (5th) 497

Principles of Economics- Mankiw (5th) 497 - consumer price...

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CHAPTER 23 MEASURING THE COST OF LIVING 513 2. Find the Prices. The second step in computing the consumer price index is to find the prices of each of the goods and services in the basket for each point in time. The table shows the prices of hot dogs and hamburgers for three different years. 3. Compute the Basket’s Cost. The third step is to use the data on prices to calculate the cost of the basket of goods and services at different times. The table shows this calculation for each of the three years. Notice that only the prices in this calculation change. By keeping the basket of goods the same (4 hot dogs and 2 hamburgers), we are isolating the effects of price changes from the effect of any quantity changes that might be occurring at the same time. 4. Choose a Base Year and Compute the Index. The fourth step is to designate one year as the base year, which is the benchmark against which other years are compared. To calculate the index, the price of the basket of goods and Table 23-1 C ALCULATING THE C ONSUMER P RICE I NDEX AND THE I NFLATION R ATE : A N E XAMPLE . This table shows how to calculate the
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Unformatted text preview: consumer price index and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and hamburgers. S TEP 1: S URVEY C ONSUMERS TO D ETERMINE A F IXED B ASKET OF G OODS 4 hot dogs, 2 hamburgers S TEP 2: F IND THE P RICE OF E ACH G OOD IN E ACH Y EAR Y EAR P RICE OF H OT D OGS P RICE OF H AMBURGERS 2001 $1 $2 2002 2 3 2003 3 4 S TEP 3: C OMPUTE THE C OST OF THE B ASKET OF G OODS IN E ACH Y EAR 2001 ($1 per hot dog 4 hot dogs) ($2 per hamburger 2 hamburgers) $8 2002 ($2 per hot dog 4 hot dogs) ($3 per hamburger 2 hamburgers) $14 2003 ($3 per hot dog 4 hot dogs) ($4 per hamburger 2 hamburgers) $20 S TEP 4: C HOOSE O NE Y EAR AS A B ASE Y EAR (2001) AND C OMPUTE THE C ONSUMER P RICE I NDEX IN E ACH Y EAR 2001 ($8/$8) 100 100 2002 ($14/$8) 100 175 2003 ($20/$8) 100 250 S TEP 5: U SE THE C ONSUMER P RICE I NDEX TO C OMPUTE THE I NFLATION R ATE FROM P REVIOUS Y EAR 2002 (175 100)/100 100 75% 2003 (250 175)/175 100 43%...
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