Ch. 6 - Measuring Cost of Living Flashcards
CPI is the…
Consumer Price Index
-measures typical consumer’s cost of living
COLAs stands for? How does it relate to CPI
“cost of living adjustments”; CPI is the basis for the adjustments made in many contracts and social security
How is CPI calculated?(5 steps)
- Determine “basket” (typical shopping basket)
- Find Prices (of items in the basket)
- Compute Basket’s Cost (sum of items in it)
- Choose Base Year and Compute index
100 x (cost of living current year/cost of living base year) - Compute Inflation Rate
100% x ((CPI current - CPI last)/CPI last)
Formula for computing index of current CPI?
100 x (cost of basket in current year / cost of basket in base year)
Formula for inflation rate (w/ regards to CPI)?
100% x ((CPI current - CPI last)/CPI last)
Problems w/ the CPI? (3) Main Result?
- Commodity Sub Bias
- Introduction of New Goods
- Unmeasured Quality Change
- Result: CPI overstates increases in the cost of living
Problems with the CPI suggest the COLAs are larger than necessary (t/f)
t
Bank of Canada estimates that the CPI is overstated ____% per year.
6.
Commodity Substitution Bias is…
some prices rise faster over time. consumers sub to goods that are cheaper, CPI misses this b/c of the fixed basket
Introduction of New Goods is…
problem where incr in variety allows sub of new goods, in effect dollars are worth more, CPI misses b/c the basket is fixed.
Unmeasured Quality Change is…
problem where stats Canada misses (probably) some inpr in quality of goods in basket which would essentially make the dollar more valuable.
Two differences in GDP Deflator and CPI are…
- GDP deflator reflects all prices of ALL G+S produced. CPI only reflects those bought by consumers.
- CPI uses a fixed basket. GDP uses P of current G+S to P of same G+S in base year.
t/f - imported consumer goods are included in the CPI + excluded in the GDP deflator.
t
t/f - CPI includes Capital Goods while GDP deflator excludes them
f - other way. CPI excludes while GDP includes Capital Goods
B/w CPI and GDP which uses the fixed basket?
CPI is fixed, GDP is current.
