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Chapter 11 - Measuring the Cost of Living

by: Erin Payne

Chapter 11 - Measuring the Cost of Living Econ 110

Marketplace > Kansas State University > Economcs > Econ 110 > Chapter 11 Measuring the Cost of Living
Erin Payne

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About this Document

These notes cover the lectures of Dr. Mohaned Al-Hamdi for the week 3/7/16 - 3/9/16 (Week 8).
principles of Macroeconomics
Dr. Al-Hamdi
Class Notes
Macroeconomics, Econ, 110, Chapter, 11, measuring, cost, Of, living
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This 2 page Class Notes was uploaded by Erin Payne on Monday May 9, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 16 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.

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Date Created: 05/09/16
  Week 8  March 7th ­ March 9th  Spring 2016  Chapter 11 Notes  Measuring the Cost of Living    ● Consumer Price Index (CPI)  ○ Measure of the overall level of prices.  ○ Measure of the overall cost of goods and services.  ■ Bought by a typical consumer.  ○ Bureau of Labor Statistics.  ● Cost of living = ∑ Cost of each item = ∑ (Price x Quantity)  ○ Where quantity is fixed (because most families do not change what they buy).  ● Calculating CPI  ○ Fix the basket.  ■ Which prices are most important to the typical consumer.  ■ Different weight.  ○ Find the prices.  ■ At each point in time.  ○ Compute the basket’s cost.  ■ Same basket of goods.  ■ Isolate the effects of price changes.  ○ Choose a base year and compute the CPI.  ■ Base year = benchmark.  ● Price of basket of goods and services in current year.  ● Divided by price of basket in base year.  ● Times 100.  ■ Compute the inflation rate.  ■ Inflation rate in year 2  =  PI inCPI in year 1 in X 100  ● Inflation rate  ○ Percentage change in the price index.  ■ From the preceding period.  ● Producer price index, PPI.  ○ Measure of the cost of a basket of goods and services bought by firms.  ○ Changes in PPI are often thought to be useful in preceding changes in CPI.  ● Problems in measuring the cost of living  ○ Substitution bias.  ■ Prices do not change proportionately.  ■ Consumers substitute toward goods that have become relatively less  expensive.  ○ Introduction of new goods.  Notes Key:Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided by instructor.   Week 8  March 7th ­ March 9th  Spring 2016  ■ More variety of goods.  ○ Unmeasured quality change.  ■ Changes in quality.  ● GDP deflator  ○ Ratio of nominal GDP to real GDP.  ○ Reflects prices of all goods and services produced domestically.  ○ Compares the price of currently produced goods and services.  ■ To the price of the same goods and services in the base year.  ● CPI  ○ Reflects prices of goods and services bought by consumers.  ○ Compares price of a fixed basket of goods and services.  ■ To the price of the basket in the base year.  ● For imports, GDP will not change, however CPI will.  ● CPI more drastically shows inflation rate.  ● For exports, GDP will be affected, while CPI will not.  Price level in period T ● Amount in period T  =  Amount in previous period X  Price level in previous period ● Dollar figures from different times  ○ Amount in today s dollars  =  Amount in year T dollars X  Price level in year T ● Indexation  ○ Automatic correction by law or contract.  ○ Of a dollar amount.  ○ For the effects of inflation.  ○ COLA: Cost of living allowance.  ● Nominal interest rate  ○ Interest rate as usually reported.  ○ Without a correction for the effects of inflation.  ○ “Interest rate as state without taking inflation into account.”  ● Real interest rate  ○ Interest rate corrected for the effects of inflation.  ○ = Nominal interest rate ­ Inflation rate.  ○ “Interest rate after accounting for inflation.”  Notes Key: Bolded texts = most important facts stressed by professor.       ∴ symbol = “Therefore” or “In other words”.       “ ” = Specific definition or word choice provided by i structor.


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