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Chapter 11 Measuring the Cost of Living
Terms in this set (7)
Consumer price index
measure of the overall level of prices and the overall cost of goods and service
Fix the basket, Find the prices, compute the basket's cost, choose a base year and compute the CPI, and compute the inflation rate
How do you calculate the CPI?
CPI this year - CPI last year / CPI last year x 100
what is the inflation rate formula?
Substitution bias, introduction of New Goods, unmeasured quality change, each of these problems causes the CPI to overstate cost of living increases
What are the problems with the CPI?
Over time, some prices rise faster than others, consumers substitute toward goods that become relatively cheaper, mitigating the effects of price increases, the CPI misses this substitution because it uses a fixed basket of goods, and the CPI overstates increases in the cost of living
what happens with the substitution bias problem for the CPI?
the introduction of new goods increases variety, allows consumers to find products that more closely meet their needs, in effect dollars become more valuable, the CPI misses this effect because it uses a fixed basket of goods, and the CPI overstates increase in the cost of living
what happens with the introduction of new goods problem for the CPI?
improvements in the quality of goods in the basket increase the value of each dollar; the BLS tries to account for quality changes but probably misses some, as quality is hard to measure; the CPI overstates increases in the cost of living
what happens with the unmeasured quality change problem for the CPI?
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