Measuring the cost of living

Question 1

Why is it important to changes in quality into price changes?

Answer 1

Is adjustment for quality improvement would not be taken into account when calculating price changes, it is likely that due to rapid technology changes, which make products even cheaper, Prices would potentially be over inflated.

Question 2

Which has a greater effect on consumer: 10% in chicken or 10% in caviar.

Answer 2

1. Step when calculating the chi is to fix the basket. This means to determine which prices are most important to the typical customer.
   Hence a 10% increase in chicken would have a greater effect than a 10% increase in caviar.

Question 3

3 problems that make the CPI an imperfect measure.

Answer 3

Substitution bias: prices do not all change from one year to another some will rise some will fall. Consumer will respond to that and buy good that become cheaper.
Introduction of new goods: increase the variety fro. Which co Sumer can choose. Greater variety makes the money more valuable, so fewer money to obtain standards of living will be necessary.
Unmeasured quality change.

Question 4

Meaning of nominal and real interest rate.

Answer 4

Nominal: usually reported with average discount rates of short term government bonds and is not corrected for the effects of inflation.( tells you how fast the nr of € rises in your bank account)
Real: adjusted for the effects on inflation and tells you how fast the purchasing power of the money in your bank account rises.
Real interest rate = nominal interest rate - inflation rate