11k2_Prices_Part_II

11k2_Prices_Part_II - Prices Part II Readings Click to edit...

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Click to edit Master subtitle style Prices Part II Readings: Zagorsky Chapter 5 “Prices In the Economy”
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Introduction: Why Do We Care? Many public and private contracts contain automatic price escalation clauses Union Contracts Rental Agreements Social Security Tax Brackets/Deductions Central Bankers care They have a huge influence on short term interest rates.
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Click to edit Master subtitle style Does the CPI Misstate Inflation?
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Problems With CPI? The CPI is an accurate measure of the selected goods that make up the typical bundle, but it is not a perfect measure of the cost of living. It has some problems 1) Deliberate lying 2) Outlet bias 3) Introduction of new goods 4) Substitution bias 5) Unmeasured quality changes 6) Storage and Sales
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Deliberate Lying Autocratic regimes help prop themselves up by releasing false economic indicators. Classic case was Soviet Union before its collapse in the late 1980s. Economic numbers were not trustworthy. Understates inflation
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Outlet Bias U.S. shoppers over time are buying more at giant warehouse stores like Costco and Sam’s Club. Problem with these stores Not everyone is admitted. Only people who are members. Hence, not everyone is entitled to outlet prices These stores do not sell 1 can of tuna or 2 oranges. Instead you buy tuna in 5 pound cans and cases of oranges. This makes it difficult to combine prices from these stores with general prices found in regular supermarkets. Hence, they are not included.
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New Goods The basket does not reflect the change in purchasing power brought on by the introduction of new products. New products result in greater variety, which in turn makes each dollar more valuable. Consumers need fewer dollars to maintain any given standard of living.
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The basket does not change to reflect consumer reaction to changes in relative prices. Consumers substitute toward goods that have become relatively less expensive. The index overstates the increase in cost of
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11k2_Prices_Part_II - Prices Part II Readings Click to edit...

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