Chapter 6 - Chapter 6 Measuring the cost of Living...

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Unformatted text preview: Chapter 6 Measuring the cost of Living Inflation measures the % change in the aggregate price level in the economy. How is the aggregate price level measured? Price Index: measures cot of purchasing a given market basket in a given year relative to the base year. 3 Price Indices: 1. 2. 3. ___________________________ Formula: Price Index = Consumer Price Index ( CPI) Measures the price of a basket of goods consumed by a typical household. measures the typical consumers cost of living the basis of cost of living adjustments (COLAs) in many contracts and in Social Security M E A S U R IN G T H E C O S T O F L IV IN G 9 W h a t s i n t h e C P I s B a s k e t ? 4 3 % 1 7 % 1 5 % 6 % 6 % 6 % 4 % 3 % H o u s in g T r a n s p o r ta tio n F o o d & B e v e r a g e s M e d ic a l c a r e R e c r e a tio n E d u c a tio n a n d c o m m u n ic a tio n A p p a r e l O th e r MEASURING THE COST OF LIVING 3 How the CPI Is Calculated 1. Fix the basket. The Bureau of Labor Statistics (BLS) surveys consumers to determine whats in the typical consumers shopping basket. 2. Find the prices. The BLS collects data on the prices of all the goods in the basket. 3. Compute the baskets cost. Use the prices to compute the total cost of the basket. MEASURING THE COST OF LIVING 4 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 ______year cost of basket in _____year CPI this year CPI last year CPI last year Inflation rate x 100% = MEASURING THE COST OF LIVING 5 EXAMPLE basket: {4 pizzas, 10 lattes} $__x 4 + $__x 10 = $ $__ x4 + $__ x 10 = $ $__ x4 + $__ x10 = $ cost of basket $3.00 $2.50 $2.00 price of latte $12 2009 $11 2008 $10 2007 price of pizza year Compute CPI in each year 2007 as the base year 2007: 100 x ($___/$___) = 2008: 100 x ($___/$___) = 2009: 100 x ($___/$___) = __% _____ ___ ___ x 100% = __% _____ ___ ____ x 100% = Using Inflation Rate Problems in Measuring the Cost of Living 1. Substitution Bias When the price of one good changes, consumers often respond...
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This note was uploaded on 12/26/2010 for the course ECO 181 taught by Professor Cherry during the Fall '07 term at SUNY Buffalo.

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Chapter 6 - Chapter 6 Measuring the cost of Living...

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