{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

17.Measuring the Cost of Living

17.Measuring the Cost of Living - ECO108/Spring 2011...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
ECO108 /Spring 2011 Instructor: Jieruo Liu Lecture17. Measuring the Cost of Living (Mankiw, chapter 16) The Consumer Price Index (CPI): o It measures the typical consumer’s cost of living How the CPI Is Calculated? o Three Steps: 1. Fix the “basket”: The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” 2. Find the prices: The BLS collects data on the prices of all the goods in the basket. 3. Compute the basket’s cost: Use the prices to compute the total cost of the basket. 4. Choose a base year and compute the index: The CPI in any year equals 100 x (cost of basket in current year/ cost of basket in base year) 5. Compute the inflation rate: The percentage change in the CPI from the preceding period: Inflation rate = (CPI last year CPI this year)/CPI last year *100%
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
ECO108 /Spring 2011 Instructor: Jieruo Liu Problems with the CPI: o Substitution Bias: Over time, some prices rise faster than others. Consumers substitute toward goods that become relatively cheaper. The CPI misses this
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}