Flashcards in Ch. 6 - Measuring Cost of Living Deck (19):

1

## CPI is the...

###
Consumer Price Index

-measures typical consumer's cost of living

2

## COLAs stands for? How does it relate to CPI

### "cost of living adjustments"; CPI is the basis for the adjustments made in many contracts and social security

3

## How is CPI calculated?(5 steps)

###
1. Determine "basket" (typical shopping basket)

2. Find Prices (of items in the basket)

3. Compute Basket's Cost (sum of items in it)

4. Choose Base Year and Compute index

100 x (cost of living current year/cost of living base year)

5. Compute Inflation Rate

100% x ((CPI current - CPI last)/CPI last)

4

## Formula for computing index of current CPI?

### 100 x (cost of basket in current year / cost of basket in base year)

5

## Formula for inflation rate (w/ regards to CPI)?

### 100% x ((CPI current - CPI last)/CPI last)

6

## Problems w/ the CPI? (3) Main Result?

###
1. Commodity Sub Bias

2. Introduction of New Goods

3. Unmeasured Quality Change

-Result: CPI overstates increases in the cost of living

7

##
Problems with the CPI suggest the COLAs are larger than necessary (t/f)

### t

8

## Bank of Canada estimates that the CPI is overstated ____% per year.

### 6.

9

## Commodity Substitution Bias is...

### some prices rise faster over time. consumers sub to goods that are cheaper, CPI misses this b/c of the fixed basket

10

## Introduction of New Goods is...

### problem where incr in variety allows sub of new goods, in effect dollars are worth more, CPI misses b/c the basket is fixed.

11

## Unmeasured Quality Change is...

### problem where stats Canada misses (probably) some inpr in quality of goods in basket which would essentially make the dollar more valuable.

12

## Two differences in GDP Deflator and CPI are...

###
1. GDP deflator reflects all prices of ALL G+S produced. CPI only reflects those bought by consumers.

2. CPI uses a fixed basket. GDP uses P of current G+S to P of same G+S in base year.

13

## t/f - imported consumer goods are included in the CPI + excluded in the GDP deflator.

### t

14

## t/f - CPI includes Capital Goods while GDP deflator excludes them

### f - other way. CPI excludes while GDP includes Capital Goods

15

## B/w CPI and GDP which uses the fixed basket?

### CPI is fixed, GDP is current.

16

## Formula for correcting for inflation is?

### Amount in Today's $ = Amount year __$ x (P level today/P level year ___)

17

## Nominal Inflation rate is...

### not corrected for inflation. $ value of a deposit or debt.

18

## Real Inflation Rate is...

### corrected. growth in purchasing power of a deposit or debt.

19