Chapter 8 Flashcards
Market Basket
Includes specific goods and services, in fixed quantities that roughly correspond to a typical consumer’s spending.
Consumer Price Index (CPI)
Tracks changes in the cost of a basket of goods and services purchased by a typical Canadian household.
What are urban consumers
People living in a city with 100,000 people or more
What are the two main reasons for changes in consumption
Substitution and innovation
Substitution
The idea that people switch between similar goods and services when relative prices shift
Innovation
As new goods and services become available, people change what they consume
Hedonic quality adjustment
Statistics Canada tries to estimate what the price of an item would be without improved features
What can we do with price indexes
Isolate changes in prices from changes in fundamentals like income and output and express those changes in constant dollars relative to a base year
Inflation Rate
Represents the size of the change in the overall price level
What does all-items inflation measure
The changes in prices for the entire market basket of the average urban consumer
Core inflation
Measures price changes using eight of the CPIs most volatile components
What is PPI considered a good predictor of
Future consumer prices
What is inflation measured as
A percent increase in the index from one year to the next
What does the GDP deflator measure
Price changes for everything produced in a country
Indexing
Automatically increases payments in proportion to the cost of living (max 2% per year)
What do indexed payments refer to
Cost-of-living adjustments (COLAs)
-includes unions
Purchasing Power Parity (PPP) and the three main factors
Purchasing power should be the same everywhere, when stated in a common currency
-transaction costs, non-tradable goods and services, trade restriction
Non-tradables
Some goods and services can’t be transported so they are called non-tradables
Trade Restrictions
International trade isn’t free. Tariffs and trade restrictions increase the cost
Purchasing Power Indexes
Used to compare prices in different places
Measures price of goods & services purchased by firms including capital goods and raw material
International comparison program (ICP)
Uses a broad market basket that tries to represent the full cost of living across countries
