Ch. 6 - Measuring Cost of Living Flashcards Preview

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

CPI is the...

Consumer Price Index
-measures typical consumer's cost of living


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


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)


Formula for computing index of current CPI?

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


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

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


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


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



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



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


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.


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.


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.


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



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

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


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

CPI is fixed, GDP is current.


Formula for correcting for inflation is?

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


Nominal Inflation rate is...

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


Real Inflation Rate is...

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


Formula for real inflation rate is...

real IR = nominal IR - inflation rate