Macro Chapter 6

# Macro Chapter 6 - CHAPTER 6 MEASURING THE COST OF LIVING...

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CHAPTER 6 CHAPTER 6 MEASURING THE COST OF LIVING MEASURING THE COST OF LIVING

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Main ideas What is the Consumer Price Index (CPI)? How is CPI calculated? What is the CPI used for? What are the problems with the CPI? How serious are they? How does the CPI differ from the GDP deflator? How can we use the CPI to compare dollar amounts from different years? Why would we want to do this ? How can we correct interest rates for inflation?
Consumer Price Index (CPI) Inflation Inflation refers to a situation in which the economy’s overall price level is rising. The inflation rate inflation rate is the percentage change in the price level from the previous period. The consumer price index (CPI) consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. Statistics Canada reports the CPI each month. CPI is used to monitor changes in the cost of living over time.

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Calculation of CPI   1. Determine the Basket: Determine what prices are most important to the typical consumer. If the typical consumer buys more of good 1 than good 2, the price of good 1 is given more weight in measuring the cost of living Statistics Canada sets these weights by surveying consumers to find out the basket of goods the typical consumer buys
How the CPI Is Calculated (cont.) 1. Find the Prices: Find the prices of each of the goods and services in the basket for each point in time. 2. Compute the Basket’s Cost : Use data on prices to calculate the cost of the basket of goods and services at different times.

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1. 1. Choose a Base Year and Compute the Index: Choose a Base Year and Compute the Index: Designate one year as the base year – make it the benchmark against which other years are compared. Compute the index by dividing the price of the basket
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Macro Chapter 6 - CHAPTER 6 MEASURING THE COST OF LIVING...

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