Chapter 8: The Cost of Living Flashcards
Define ‘Market basket’.
A list of specific goods an services in fixed quantities.
Define ‘Price index’.
A measure showing how much the cost of a market basket has risen or fallen relative to the cost in a base period or location.
Define ‘Consumer Price Index (CPI)’.
A measure that tracks changes in the cost of a basket of goods and services purchased by a typical Canadian household as calculate by Statistics Canada.
CPI = (basket_desired-yr / basket_base-yr) x100
Define ‘Inflation rate’.
The size of the change in the overall price level year to year, calculated by measuring the percent change in a price index from one year to the next.
Inflation rate = (CPI_yr2 - CPI_yr1) / CPI_yr1 x100
Define ‘Indexing’.
The practice of automatically increasing payments as the cost of living increases.
Define ‘Purchasing power parity’.
The theory that price levels indifferent countries should be the same when stated in a common currency.
Define ‘PPP-adjustment’.
Recalculating economic statistics to account for differences in price levels across countries.
By keeping goods and quantities constant in a market basket, we can be sure that any changes in the total cost of the basket is caused by a change in ___, rather than the type or amount of things being consumed.
Prices.
What is the most commonly used tool for measuring the cost of living in Canada?
CPI.
How do you calculate price index?
The ratio of the cost of the market basket in that year to the cost in the base year, x100. In the base year, the index will always be 100.
What are the largest 3 components of the CPI, which together make up over a 3rd?
Shelter (over 25%), Transportation, Food.
Name the 2 main challenges Statistics Canada faces when measuring price changes and how they respond to these challenges.
- How to decide which consumption should be measured. Bases CPI on average of goods and services purchased by urban consumers (69% of Can. pop.). It also presents two measures of the basket: all-items inflation and core inflation (no food and energy, top 8 volatile).
- How to account for changes in consumption over time. Substitution and quality vs. rising price (hedonic quality adjustment).
What are the 3 methods used to calculate the inflation rate? (Track each other quite closely)
- Estimates based on the CPI include price changes in imported consumer goods, i.e. toys from china.
- Estimates based on the PPI measure the prices of goods and services purchased by firms and may predict future increases in consumer prices.
- Estimates based on the GDP deflator exclude imports but include domestically produced items that are not part of the typical person’s consumption basket.
Indexing is an important application of the need to adjust ___ values into their real purchasing power.
Nominal.
What are some reasons PPP doesn’t typically hold true?
Transaction costs, non-tradable goods an services, and trade restrictions.
