Economic growth assignment.docx - Running head GROUP...

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Running head: GROUP ASSIGNMENT 1 Group Assignment Mariana Correa & Maria Cerero George Brown College
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Running head: GROUP ASSIGNMENT 2 1. Use the table below to answer the following question. Table 21.3.2 Data from Southton Price (dollars) Price (dollars) Quantity (number) Quantity (number) Item Base Current Base Current Rubber Ducks Beach Towels 1.00 9.15 1.35 6.00 90 12 100 14 a) Refer to Table 21.3.2. From the data in Table 21.3.2. What is Southton's consumer price index for the current year and what is the rate of inflation over the base year? Show your calculations. Cost f CPI basket (base year) = $199.8 Rubber Ducks = $1.00 x 90 = $90 Beach Towels = $9.15 x 12 = $109.8 Cost of CPI basket (current year) = $193.5 Rubber Ducks = $1.35 x 90 = $121.5 Beach Towels = $6.00 x 12 = $72 Consumer Price Index for the current year = 96.847 = {(cost CPI basket current year) / (cost CPI basket previous year) } x 100 = {$193.5 / $199.8} x 100 = 96.847 Inflation rate over the base year = -3.153% = {(CPI current year – CPI last year) / (CPI last year) } x 100 = {($193.5 - $199.8) / ($199.8)} x 100
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Running head: GROUP ASSIGNMENT 3 = {$-6.3 / $199.8} x 100 = -3.153% b) When CPI is reported, commodity substitution bias in CPI is not considered. What does commodity substitution bias mean and why does it occur? The Consumer Price Index is subject to various types of measurement bias as it measures changes in the cost of living. Commodity substitution constitutes one of the biases taken into consideration when constructing a nation´s CPI. It occurs when consumers substitute items that become more expensive when the relative prices of different products change between basket updates for those that are cheaper. Considering the shift in spending that commodity substitution represents, the actual increase in the overall cost of living is less than the increase in the cost of buying the original fixed basket; therefore, the real cost of living can be overstated if there is a commodity substitution bias (Rossiter, 2013).
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