Term
| The Consumer Price Index= _ _ _ |
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Definition
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Term
| what does the consumer price index (CPI) do? |
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Definition
| measures the typical consumer’s cost of living |
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Term
| How the CPI Is Calculated? |
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Definition
1.Fix the “basket.”
2.Find the prices.
3.Compute the basket’s cost.
4.Choose a base year and compute the index.
5.Compute the inflation rate. |
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Term
| _______________ The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” |
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Definition
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Term
| ______________ The BLS collects data on the prices of all the goods in the basket. |
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Definition
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Term
| ________________ Use the prices to compute the total cost of the basket |
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Definition
| Compute the basket’s cost |
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Term
__________________ The CPI in any year equals
100x(cost of basket in current year)/(cost of basket in base year) |
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Definition
| Choose a base year and compute the index. |
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Term
__________________ The percentage change in the CPI from the preceding period.
(CPI this year-CPI last year)/(CPI last year)x100% |
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Definition
| Compute the inflation rate. |
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Term
| Problems with the CPI: Substitution Bias |
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Definition
-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.
-Thus, the CPI overstates increases in the cost of living. |
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Term
| Problems with the CPI: Introduction of New Goods |
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Definition
-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.
-Thus, the CPI overstates increases in the cost of living. |
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Term
| Problems with the CPI: Unmeasured Quality Change |
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Definition
-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.
-Thus, the CPI overstates increases in the cost of living. |
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Term
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Definition
-included in CPI
-excluded from GDP deflator |
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Term
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Definition
-excluded from CPI
-included in GDP deflator (if produced domestically) |
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Term
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Definition
-CPI uses fixed basket
-GDP deflator uses basket of currently produced goods & services |
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Term
| The nominal interest rate: |
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Definition
-the interest rate not corrected for inflation
-the rate of growth in the dollar value of a deposit or debt |
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Term
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Definition
-corrected for inflation
-the rate of growth in the purchasing power of a deposit or debt |
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Term
| Correcting Variables for Inflation: Real vs. Nominal Interest Rates |
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Definition
| Real interest rate = (nominal interest rate) – (inflation rate) |
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