CH6 - Measuring the Cost of Living

Question 1

Consumer Price Index (CPI)

Answer 1

-> measure of the overall cost of the goods and services bought by a typical consumer
-> basketful of goods that an urban family of four purchases on a regular basis

Question 2

Deflation vs Disinflation

Answer 2

deflation is when inflation rates fall below zero + prices generally decline, disinflation is when the inflation rate falls but remains positive, prices continue to increase but at a slower rate

Question 3

Core Inflation

Answer 3

excludes the most volatile components (prices changes are temporary) from the CPI basket of goods and services (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products—19% of the CPI basket)

Useful in predicting the underlying trend of inflation as measures by changes in the CPI

Question 4

5 problems in measuring the cost of living

Answer 4

1 - commodity substitution bias : prices don’t all change proportionately from y to y, people buy more of the less expensive substitution
2 - new goods bias : more variety of g -> less expensive
3 - unmeasured quality of change : quality can deteriorate or rise even if it costs the same
4 - outlet bias : discount retailers, large warehouse stores, internet shopping
5 - nobody is typical : students, seniors etc. all buy different things

Question 5

how much CPI is overstated

Answer 5

0.5 percentage points per year
-> affects pension programs, social payments, wage settlements

Question 6

CPP (Canada Pension Plan)

Answer 6

-> mandatory federal public pension plan for persons aged 18 and over who earn more than 3500$ a year
-> monthly retirement benefit is designed to replace up to 33% of the average person’s lifetime pre-retirement employment earnings, up to a maximum amount

Question 7

OAS program

Answer 7

-> non-contributory, residence-based program, finances through general tax revenues, the objective of which is to ensure a minimum income to Canadians aged 65 and over

Question 8

GDP Deflator vs CPI

Answer 8

1 - where G&S are produced (CPI includes imports)
2 - how various prices are weighted to yield a single number for the overall level of prices (CPI - fixed basket of goods, Deflator - currently produced G&S)

Question 9

indexation

Answer 9

When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation

-> Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times

-> COLA cost-of-living-allowance = long-term contracts between firms and unions that include partial of complete indexation of the wage to the consumer price index

Question 10

the law of one price

Answer 10

The notion that a good should sell for the same price in all markets