How the BLS constructs the CPI 1 Survey consumers to determine composition of

How the bls constructs the cpi 1 survey consumers to

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How the BLS constructs the CPI 1 . Survey consumers to determine composition of the typical consumer’s “basket” of goods. 2 . Every month, collect data on prices of all items in the basket; compute cost of basket 3 . CPI in any month equals Cost of basket in that month Cost of basket in base period 100
Exercise: Compute the CPI Basket contains 20 pizzas and 10 compact discs. prices: pizza CDs 2002 \$10 \$15 2003 \$11 \$15 2004 \$12 \$16 2005 \$13 \$15 For each year, compute the cost of the basket the CPI (use 2002 as the base year) the inflation rate from the preceding year
Answers: Cost of Inflation basket CPI rate 2002 \$350 100.0 n.a. 2003 370 105.7 5.7% 2004 400 114.3 8.1% 2005 410 117.1 2.5%
Why weightage? Some spending is more important than other Food more important than luxury
The composition of the CPI’s “basket”
Reasons why the CPI may overstate inflation Substitution bias : The CPI uses fixed weights, so it cannot reflect consumers’ ability to substitute toward goods whose relative prices have fallen. Introduction of new goods : The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights. Unmeasured changes in quality : Quality improvements increase the value of the dollar, but are often not fully measured.
The size of the CPI’s bias In 1995, a Senate-appointed panel of experts estimated that the CPI overstates inflation by about 1.1% per year. So the BLS made adjustments to reduce the bias. Now, the CPI’s bias is probably under 1% per year.
CPI vs. GDP Deflator Prices of capital goods included in GDP deflator (if produced domestically) excluded from CPI Prices of imported consumer goods included in CPI excluded from GDP deflator The basket of goods CPI: fixed GDP deflator: changes every year
Two measures of inflation in the U.S . Percentage change from 12 months earlier
1.4 Measuring Unemployment
U.S. unemployment rate (% of labor force) 0 5 10 15 20 25 30 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Categories of the Population employed working at a paid job unemployed not employed but looking for a job labor force the amount of labor available for producing goods and services; all employed plus unemployed persons not in the labor force not employed, not looking for work
Two important labor force concepts unemployment rate percentage of the labor force that is unemployed labor force participation rate the fraction of the adult population that “participates” in the labor force
Exercise: Compute labor force statistics U.S. adult population by group, June 2006 Number employed = 144.4 million Number unemployed = 7.0 million Adult population = 228.8 million Use the above data to calculate the labor force the number of people not in the labor force the labor force participation rate the unemployment rate
Answers: data: E = 144.4, U = 7.0, POP = 228.8 labor force L = E + U = 144.4 + 7 = 151.4 not in labor force NILF = POP L = 228.8 – 151.4 = 77.4 unemployment rate U/L x 100% = (7/151.4) x 100% = 4.6% labor force participation rate L/POP x 100% = (151.4/228.8) x 100% = 66.2%
Two Measures of Employment Growth Percentage change from 12 months earlier

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