Chapter 6 Flashcards
What does the Consumer Price Index (CPI) measure?
the overall cost of goods and services bought by typical consumers/households (cost of living)
Is CPI a good indicator for cost of living?
No, the ‘basket’ does not accurately reflect the changes in consumer behavior/preferences, consumer may choice to purchase items outside the ‘basket’ since they are cheaper
what is substitution bias when calculating CPI?
Purchases made outside the ‘basket’ are not considered since the ‘basket’ items stay constant
CPI vs GDP deflator, how would you describe them, distinctions, similarities?
CPI: measures prices of goods and services purchased by typical consumers
GDP: same as CPI measure but includes government business and foreigners
Both: measure prices over time using a basket model (GDP deflator changes yearly)
List use of CPI
Adjust past values to current values