Chapter 8

Question 1

Market Basket

Answer 1

Includes specific goods and services, in fixed quantities that roughly correspond to a typical consumer’s spending.

Question 2

Consumer Price Index (CPI)

Answer 2

Tracks changes in the cost of a basket of goods and services purchased by a typical Canadian household.

Question 3

What are urban consumers

Answer 3

People living in a city with 100,000 people or more

Question 4

What are the two main reasons for changes in consumption

Answer 4

Substitution and innovation

Question 5

Substitution

Answer 5

The idea that people switch between similar goods and services when relative prices shift

Question 6

Innovation

Answer 6

As new goods and services become available, people change what they consume

Question 7

Hedonic quality adjustment

Answer 7

Statistics Canada tries to estimate what the price of an item would be without improved features

Question 8

What can we do with price indexes

Answer 8

Isolate changes in prices from changes in fundamentals like income and output and express those changes in constant dollars relative to a base year

Question 9

Inflation Rate

Answer 9

Represents the size of the change in the overall price level

Question 10

What does all-items inflation measure

Answer 10

The changes in prices for the entire market basket of the average urban consumer

Question 11

Core inflation

Answer 11

Measures price changes using eight of the CPIs most volatile components

Question 12

What is PPI considered a good predictor of

Answer 12

Future consumer prices

Question 13

What is inflation measured as

Answer 13

A percent increase in the index from one year to the next

Question 14

What does the GDP deflator measure

Answer 14

Price changes for everything produced in a country

Question 15

Indexing

Answer 15

Automatically increases payments in proportion to the cost of living (max 2% per year)

Question 16

What do indexed payments refer to

Answer 16

Cost-of-living adjustments (COLAs)

-includes unions

Question 17

Purchasing Power Parity (PPP) and the three main factors

Answer 17

Purchasing power should be the same everywhere, when stated in a common currency
-transaction costs, non-tradable goods and services, trade restriction

Question 18

Non-tradables

Answer 18

Some goods and services can’t be transported so they are called non-tradables

Question 19

Trade Restrictions

Answer 19

International trade isn’t free. Tariffs and trade restrictions increase the cost

Question 20

Purchasing Power Indexes

Answer 20

Used to compare prices in different places

Measures price of goods & services purchased by firms including capital goods and raw material

Question 21

International comparison program (ICP)

Answer 21

Uses a broad market basket that tries to represent the full cost of living across countries