Econ 101 Test 4 Flashcards
What is the Consumer Price Index (CPI)?
measures the typical consumer’s cost of living and is used to calculate the inflation rate
Why CPI?
- to measure changes in purchasing power
2. as a stabilization tool
What is included in the CPI?
goods and services that are bought by the typical urban families
How do you calculate CPI?
- fix the “basket”
- find the prices
- compute the basket’s cost
- choose a base year and compute the index
- compute the inflation rate
the value of the CPI in the base year is ALWAYS
100
Inflation Rate =
%change in CPI
What is the gov’t agency in charge of calculating the CPI?
the Bureau of Labor Statistics (BLS)
the CPI (overstates/understates) the inflation rate by ?% each year
overstates by about 0.5%
substitution bias
if the price of something increased, people may have substituted something cheaper
introduction of new goods
the CPI’s basket is fixed for periods of about 10yrs
unmeasured quality change
maybe the price went up because it now includes more features
to compare dollar figures from different times, set up a
proportion and cross multiply
