Chapter 6: Consumer Price Index Flashcards
(37 cards)
What is the consumer price index?
a measure of the overall cost of the goods and services bought by a typical consumer
What are the four steps in calculating the CPI?
1) Determine the basket
2) Find the prices
3) Compute the basket’s cost
4) Choose a base year and compute the index
What is the formula for the CPI?
CPS = 100 X (Price of basket in current year)/Price of basket in base year
If in 2016, a basket of hotdogs and hamburgers costs $8, and in 2017 the basket costs $14, the consumer price index in 2017 is 175. What is the percentage price increase?
75%
How do you calculate the inflation rate from CPI?
100 X (CPI in year 2- CPI in year 1)/ CPI in year 1
What is the inflation rate?
the percentage change in the price index from the preceding period
What is core inflation?
A measure of the underlying trend of inflation, which excludes more volatile goods such as vegetables, fruit, gasoline, oil, natural gas, mortgage interest, intercity transportation, and tobacco products.
What are the three problems in measuring cost of living?
1) Commodity substitution bias
2) introduction of new goods
3) unmeasured quality change
What is commodity substitution bias?
Prices of different things do not change proportionally. People substitute to cheaper goods, so the rising price of a basket does not actually mean consumers will be paying more for the specific goods in the basket, and therefore overstates the increase in cost of living.
What is the introduction of new goods problem for CPI?
When a new good is introduced, consumers have more variety to choose from, which makes each dollar more valuable.
What is an example of the introduction of goods problem for CPI?
introduction of the iPod; the iPod is cheaper and more convenient, which made the value greater and cost of living less for listening to music. Eventually, statistics Canada revised its basket of goods to include the iPod.
What is the unmeasured quality change problem for CPI?
If the quality of a good deteriorates, the value of a dollar falls even if the price stays the same; same thing goes for a quality increase.
What is an example of unmeasured quality change?
A car model using more or less gas than a pervious model.
Statistics Canada adjusts the price of a good to account for quality change. Is that easy to do?
absolutely not.
By how many percentage points does the Canadian CPI tend to overstate the increases to cost of living?
By about 0.5 percentage points per year
How is the GDP deflator different from the Consumer Price Index?
1) GDP deflator reflects the prices of all goods and services produced domestically, whereas the consumer price index reflects the prices of all goods and services bought by consumers
2) GDP deflator goods change based on whatever is produced in a year, the CPI stays the same.
Buying a German car shows up in GDP deflator or CPI?
CPI, because a car usually fits in a typical consumer’s basket. International purchases do not count in GDP
Is an armoured vehicle bought by the government going to show up in GDP Deflator or CPI?
GDP; no consumer is buying an armoured vehicle
Why do the GDP deflator and CPI diverge in some areas?
Different price shocks affect retailers and consumers differently. Oil and natural gas fluctuations affect consumers more than producers, for example
What is the equation to find old prices in modern dollars with CPI?
Old price in modern dollars = Old price X (New CPI /Old CPI)
Why is Gone With the Wind the second highest grossing movie of all time even though it does not appear in the official statistics?
The 1939 dollars are not adjusted for inflation.
When you find the old price in modern dollars, how do you know what the increase in price attributable to normal inflation is?
If the converted old price is smaller than the new price, there is a price increase that is faster than other goods and services.
What is indexation?
The automatic correction of a dollar amount for the effects of inflation by law or contract
What is a cost of living allowance?
A provision in a contract which automatically raises the wage when CPI rises.
