Chapter 11 Powerpoint

# Chapter 11 Powerpoint - Measuring the Cost of Living CPI...

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Measuring the Cost of Living CPI GDP deflator Inflation Chapter 11

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Measuring temperature using Index Boiling water (212 F) Current temperature (80 F) Freezing water (32 F) Temperature is an index of hotness of air
The Consumer Price Index The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The Bureau of Labor Statistics reports the CPI each month. It is used to monitor changes in the cost of living over time.

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The Consumer Price Index When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.
How the Consumer Price Index Is Calculated Fix the Basket : Determine what prices are most important to the typical consumer. (What G&S? and How many G&S? example) The Bureau of Labor Statistics (BLS) identifies a market basket of goods and services the typical consumer buys. The BLS conducts monthly consumer surveys to set the weights for the prices of those goods and services.

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How the Consumer Price Index Is Calculated Find the Prices: Find the prices of each of the goods and services in the basket for each point in time (every month like September 2006).
How the Consumer Price Index Is Calculated Compute the Basket’s Cost: Use the data on prices to calculate the cost of the basket of goods and services at different times. for each G&S, P*Q and then add up for all G&S.

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How the Consumer Price Index Is Calculated Choose a Base Year and Compute the Index: Designate one year (ex: 1990) as the base year, making it the benchmark against which other years (ex: 2006) are compared. Compute the index by dividing the cost of the basket in one year by the cost in the base year and multiplying by 100.
9 What’s in the CPI’s Basket? 43% 17% 15% 6% 6% 6% 4% 3% Housing Transportation Medical care Recreation Education and communication Apparel Other

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Calculating the Consumer Price Index and the Inflation Rate: An Example Step 1:Survey Consumers to Determine a Fixed Basket of Goods 4 hot dogs, 2 hamburgers
Calculating the Consumer Price Index and the Inflation Rate: An Example Year Price of Hot dogs Price of Hamburgers 2001 \$1 \$2 2002 \$2 \$3 2003 \$3 \$4 Step 2: Find the Price of Each Good in Each Year

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Calculating the Consumer Price Index and the Inflation Rate: An Example 2001 (\$1 per hot dog x 4 hot dogs) + (\$2 per hamburger x 2 hamburgers) = \$8 2002 (\$2 per hot dog x 4 hot dogs) + (\$3 per hamburger x 2 hamburgers) = \$14 2003 (\$3 per hot dog x 4 hot dogs) + (\$4 per hamburger x 2 hamburgers) = \$20 Step 3: Compute the Cost of the Basket of Goods in Each Year
Calculating the Consumer Price Index and the Inflation Rate: An Example

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Chapter 11 Powerpoint - Measuring the Cost of Living CPI...

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