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Chapter 11 PowerPoint - Chapter 11 The Cost of Living...

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1 CHAPTER 11 MEASURING THE COST OF LIVING Chapter 11. The Cost of Living
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2 CHAPTER 11 MEASURING THE COST OF LIVING In this chapter, look for the answers to these questions: What is the Consumer Price Index (CPI)? How is it calculated? What’s it 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, anyway? How can we correct interest rates for inflation?
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3 CHAPTER 11 MEASURING THE COST OF LIVING The Consumer Price Index (CPI) Measures the typical consumer’s cost of living. The basis of cost of living adjustments (COLAs) in many contracts and in Social Security.
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4 CHAPTER 11 MEASURING THE COST OF LIVING How the CPI Is Calculated 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. Do it for every quarter and for every year.
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5 CHAPTER 11 MEASURING THE COST OF LIVING How the CPI Is Calculated 1. Choose a base year and compute the index. The CPI in any year equals 1. Compute the inflation rate. The percentage change in the CPI from the preceding period. 100 x cost of basket in current year cost of basket in base year CPI this year CPI last year CPI last year inflation rate x 100% =
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6 CHAPTER 11 MEASURING THE COST OF LIVING EXAMPLE basket: {4 pizzas, 10 lattes} $12 x 4 + $3 x 10 = $78 $11 x 4 + $2.5 x 10 = $69 $10 x 4 + $2 x 10 = $60 cost of basket $3.00 $2.50 $2.00 price of latte $12 2005 $11 2004 $10 2003 price of pizza year Compute CPI in each year: 2003: 100 x ($60/$60) = 100 2004: 100 x ($69/$60) = 115 2005: 100 x ($78/$60) = 130 15% 13% Inflation rate:
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A A     C C     T T     I I     V V     E  L E  L     E E     A A     R R     N N     I I     N N     G   G   1 1 :    :    Calculate the CPI Calculate the CPI 7 The basket contains 20 movie tickets and 10 textbooks. The table shows their prices for 2004-2006. The base year is 2004. A. How much did the basket cost in 2004? B. What is the CPI in 2005? C. What is the inflation rate from 2005-2006? movie tickets text- books 2004 $10 $50 2005 $10 $60 2006 $12 $60 0
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A A     C C     T T     I I     V V     E  L E  L     E E     A A     R R     N N     I I     N N     G   G   1 1 :    :    Answers Answers 8 A.
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