Thisis notreflectedinthebasketofgoods exercise3

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Unformatted text preview: nflation Rates: 2010‐2009: ‐11.11% 2011‐2010: ‐46.2144 2011‐2009:‐52.19% Inflation based on GDP deflator does not take into account changes in Page 4 of 7 Umbrellas, as they are not domestically produced. c. Inflation based on CPI as before, since no change to basket. GDP changes since umbrellas are now produced domestically. GDP: Nominal and real: 2009: 1560 1560 2010: 4880 5460 GDP Deflator: 2009: 100 2010:89.38 Inflation: ‐10.62% d. The CPI will tend to overstate the COL, as the new boot will allow consumers to substitute out of the relatively expensive older model. The improvement in quality is thus not reflected in CPI, as the basket is unchanged. e. Substitution bias. As sneaker prices increase, consumers buy more boots. This is not reflected in the basket of goods. Exercise 3: Assume that the Bureau of Labor Statistics reported the following CPI data: Date CPI June 2009 201.9 June 2010 207.2 June 2011 217.4 a. What do these numbers tell you about the price level in these three years compared to the base year? b. Calculate the inflation rates for the years ending with June 2010 and June 2011. c. List two reasons why these CPI numbers might be inaccurate, and explain how the calculated CPI may differ from actual CPI. d. Complete the following table Page 5 of 7 Year 2007 2008 2009 2010 2011 CPI 56 55 221 Inflation Rate N/A 27.27% 161.43% Nominal Wage $7.15 $11...
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