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1、J 一 *Measuring the Cost of LivingMeasuring the Cost of Living Last chapter, we looked at how economists use GDP to measure the quantity of goods and services that the economy is producing. This chapter, we examines that how economists measure the overall cost of living. Consumer price index k a way

2、of turning dollarfigures into meaningful measures of purchasing power.Measuring the Cost of Living Inflation refers to a situation in which the economy's overall price level is rising. The inflation rate is the percentage changein the price level from the previous period-Content> The consumer

3、 price index> how the consumer price index is calculated> Problems in measuring the cost of living> The GDP deflator versus the CPI> Correct economic variables for the effects of inflation> Dollar figures from d if fere nt times> IndexationReal and nominal interest ratesTHE CONSUME

4、R PRICE INDEX The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The Bureau of Labor Statistics reports the CPI each month. It is used to monitor changes in the cost of living over time.&劫优CPI同比想法我0%会画居国绡当月食品价格同比上番匚二推动C P I同比上涨

5、约108个百分点 其中鲜菜侨格上涨I粮食价格上流二Z油脂的格上涨匚二二3.4%23.8%3.2%4.5%4.54.1资料来源,国家统计篇新华社记者周大庆编制。2。11年6月2.02012年8月How the Consumer Price Index IsCalculated Fix the Basket: Determine what prices are most important to the typical consumer.-The Bureau of Labor Statistics (BLS) identifies a market basket of goods and ser

6、vices the typical consumer buys.-The BLS conducts monthly consumer surveys toset the weights for the prices of those goods and services- Find the Prices: Find the prices of each of the goods and services in the basket for each point in time. Compute the Basket's Cost: Use the data on prices to c

7、alculate the cost of the basket of goods and services at different times. Choose a Base Year and Compute the Index:-Designate one year as the base year, making it the benchmark against which other years are compared-Compute the index by dividing the price of the basket in one year by the price in th

8、e baseyear and multiplying by 100.Comsumer price index(CPI)xlOO Price of basket of goods and servicesPrice of basket in base year Compute the inflation rate: The inflation rate is the percentage change in the price index from the precedi ng period. The Inflation Rate-The inflation rate is calculated

9、 as follows:厂 CPI in Year 2 - CPI in Year 1 Inflation Rate in Year xlOOCPI in Year 1Table 1 Calculating the Consumer Price Index and " theJLInflation Rate: An ExampleStep 1: Survey Consumers to Determine a Fixed Basket of Goods 4 hot dogs, 2 hamburgersCopyright©2004 South-Western$123Step 2

10、: Find the Price of Each Good in Each YearYearPrice of Hot Dogs200120022003Price of Hamburgers$234Copyright©2004 South-WesternCopyright©2004 South-Westernx 2 hamburgers) = $8x 2 hamburgers) = $14x 2 hamburgers) = $20Step 3: Compute the Cost of the Basket of Goods in Each Year2001($1per hot

11、 dogx 4hot dogs) + ($2 per hamburger2002($2per hot dogx 4hot dogs)十($3 per hamburger2003($3per hot dogx 4hot dogs) + ($4 per hamburgerStep 4: Choose One Year as a Base Year (2001) and Compute the Consumer Price Index in Each Year200120022003($8/$8) X 100 = 100($14/$8) X 100 = 175($20/$8) X 100 = 250

12、Yable 1 Calculating the Consumer Price Index and the Inflation Rate: An Example£Step 5: Use the Consumer Price Index t。Compute the Inflation Rate from Previous Year2002(175 100)/100X 100 = 75%2003(250 - 175)/175 X 100 = 43%How the Consumer Price Index IsCalculated Calculating the Consumer Price

13、 Index and the Inflation Rate: Another Example-Base Year is 2002.-Basket of goods in 2002 costs $1,200.-The same basket in 2004 costs $1,236.-CPI = ($1,236/$1,200) x 100 = 103.-Prices increased 3 percent between 2002 and2004.FYI: Whafs in the CPI's Basket?Food and beverages17%Education and commu

14、nication41%Transportati on6%6%Medical careRecreationOther goods Apparel and servicesChina食品:31.79%烟酒及用品:3.49%居住:1722%交通运输:9.95%医疗保健个人用品:9.64%衣着:8.52%家庭设备及维修服务:5.64% 娱乐教育文化用品及服务:13.75%Discussion Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of

15、 chicken or a 10 percent increase in the piece of caviar? Why?Problems in Measuring the Cost of Living The CPI is an accurate measure of the selected goods that make up the typical bundle, but it is not a perfect measure of the cost of living. WHY? Substitution bias Introduction of new goods Unmeasu

16、red quality changes Substitution Bias-The basket does not change to reflect consumer reaction to changes in relative prices Consumers substitute toward goods that have become relatively less expensive. The index overstates the increase in cost of living by not considering consumer substitution. Intr

17、oduction of New Goods-The basket does not reflect the change in purchasing power brought on by the introduction of new products. New products result in greater variety, which in turn makes each dollar more valuable" Consumers need fewer dollars to maintain any given standard of living. Unmeasur

18、ed Quality Changes-If the quality of a good rises from one year to the next, the value of a dollar rises, even if the price of the good stays the same.-If the quality of a good falls from one year to the next, the value of a dollar falls, even if the price of the good stays the same-The BLS tries to

19、 adjust the price for constant quality, but such differences are hard to measure. The substitution bias, introduction of newgoods, and unmeasured quality changes cause the CPI to overstate the true cost of living.-The issue is important because many government programs use the CPI to adjust for chan

20、ges in the overall level of prices-The CPI overstates inflation by about 1 percentage point per year.The GDP Deflator versus theConsumer Price Index The GDP deflator is calculated as follows:GDP deflator 二Nominal GDPxlOOReal GDP The BLS calculates other prices indexes: -The index for different regio

21、ns within the country.The producer price index, which measures the cost of a basket of goods and servicesThe GDP Deflator versus the Consumer Price Indexbought by firms rather than consumers-Discussion If the price of a Navy submarine rises, is the consume price index or the GDP deflator affected mo

22、re? Why?The GDP Deflator versus theConsumer Price Index Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. There are two important differences between the indexes that can cause them todiverge. The GDP deflator reflects the

23、prices of all goods and services produced domestically, whereas. .the consumer price index reflects the prices of all goods and services bought byThe GDP Deflator versus the Consumer Price Index consumers.The GDP Deflator versus theConsumer Price Index The consumer price /nc/ex compares the price of

24、 a fixed basket of goods and services to the price of the basket in the base year (only occasi on ally does the BLS change the basket). .whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.CORRECTING ECONOM

25、ICVARIABLES FOR THE EFFECTS OFINFLATIONFigure 2 Two Measures of Inflation Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times.Dollar Figures from Different Times Do the following to convert (inflate) BabeRuth's wages in 1931 to dollar

26、s in 2001:c c Price level in 2001Salary 200 = Salary 1031 x力ooi力行f price level in 1931177=$80,000 x-A15.2= $931,579Copyright©2004 South-WesternTab I eA2 T helVI o sFP op uTar M ovl e sAf All Times , Inflation AdjustedFilmYear ofTotal Domestic Gross (inReleasemillions of 2001 dollars)1. Gone wit

27、h the Wind2. Star Wars3. The Sound of Music4. E.T.: The Extra-Terrestrial5. Titanic6. The Ten Commandments7. Jaws8. Doctor Zhivago9. The Jungle Book193919771965198219971956197519651967$1,002 866 695 687640 639625 591519193751810- Snow White andth-n DwarfsCopyright©2004 South-WesternIndexation W

28、hen some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexedfor inflatio n.Real and Nominal Interest Rates Interest represents a payment in the future for a transfer of money in the past. The nominal interest rate is the interest rate usually r

29、eported and not corrected for inflation.-It is the interest rate that a bank pays. The real interest rate is the nominal interest rate that is corrected for the effects of inflation. You borrowed $1,000 for one year. Nominal interest rate was 15%. During the year inflation was 10%.Real interest rate

30、 = Nominal interest rate 一 Inflation= 15% - 10% = 5%Figure 3 Real and Nominal Interest RatesReal interest rate19801985199019952000Discussion Over a long time, the price of a candy bar rose from $0.10 to $0.60. over the same period, the consumer price index rose from 150 to 300. Adjusted for overall

31、inflation, how much did the price of the candy bar change?> Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be higher than they both expected. a. Is the real interest rate on this loan higher or lower than expected? Does th

32、e lender gain or lose from thisunexpectedly high inflation? Does the borrower gain or lose? Inflation during the 1970s was much higher than most people had expected when the decade began. How did this affect homeowners who obtained fixed-rate mortgages during the 1960s? How did it affect the banks that lent the money?Summary The consumer price index shows the cost of a basket of goods and services relative to

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