CH. 7

Created by SamanthaKrywalski 

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Economics test

What is the comsumer price index?

- a measure of the average of the prices paid by urban consumers for a fixed market basket of consumer goods and services

What is a Reference base period?

a period for which the CPI is defines to equal 100.

What are the three stages when constructing the CPI?

-selecting the CPI basket
-Conduction the monthly price survey
-calculating the CPI

What are the three steps in the calculation of the CPI?

1. find the cost of the CPI basket in at the base period prices.
2. find the cost of the CPI basket in the current period prices.
3. calculate the CPI for the base period and the current period.

What is the equation for CPI?

Cost of CPI at current period prices /
cost of CPI at base period prices
X 100

(current/base)X100

what is the inflation rate?

the percentage change in the price from one year to the next

How do you find the inflation rate?

(CPI in current year - CPI in previous year) / CPI in previous year X 100

[(CPI current - CPI pervious) / CPI previous] X 100

What is the Cost of living index?

a measure of changes in the amount of money that people would need to spend to achieve a given standard of living

why doesn't the CPI measure the cost of living?

-it doesn't measure all the compnents of the cost of living
-some components are not measures exactly

what are four potential sources of bias in the CPI?

-new goods bias
-quality change bias
-commodity substiution bias
-outlet substitution bias

Why are new goods considered a bias in the CPI and what effects would it have?

-new goods do a better job than the old goods that they replace, but cost more.
- the arrival of new goods puts an upward bias into the CPI and its measure of the inflation rate.

Why are quality chagnes considered a bias in the CPI and what effects would it have?

- better cars and televisions cost more than the versions they replace.
- A price rise that is a payment for improved quality is not inflation but might get measured as inflation.

Why are commodity substitution considered a bias in the CPI ?

- if the price of beef rises faster than the price of chicken, people buy more chicken and less beef.
-the SPI basket doesn't change to allow for the effects of substitution between goods.

Why are outlet substitution considered a bias in the CPI?

-if prices rise more rapidly, people use discount stores more frequently
- the CPI basket doesn't change to allow for the effects of outlet substitution

What is the GDP price index?

an average of current prices of all the goods and services included in GDP expressed as a percentage of base-year prices.

How do you find the GDP price index?

(Nominal GDP ÷ Real GDP) × 100.

What are two differences between the GDP price index and the CPI?

1. the GDP pride index uses the prices of ALL the goods and services in GDP.
-The CPI used prices of consumption goods and services.

2. The GDP price index weights each item using information about CURRENT AS WELL AS PASTquantities.
-in contrast, the SPI weights each item using information from a PAST consumer Expenditure Survey.

what is the PCE price index?

an average of current prices of all the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices

What is the core inflation rate?

the percentage change in the PCE index excluding food and energy

what is nominal wage rate?

the average hourly wage rate measured in the dollars of a given reference base year

What is real wage rate

the average hourly wage rate measured in the dollars of a given reference base year

how do you calculate the real wage rate?

(nominal wage rate / CPI) X 100

What is the nominal interest rate?

the dollar amount of interest expressed as a percentage of the amount loaned

what is the real interest rate?

the goods and services forgone in interest expressed as a percentage of the amount loaned

How do you find the real interest rate?

nominal interest rate - inflation rate

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