Chapter 24 Measuring the Cost of Living曼昆宏经

1、PowerPoint Slides prepared by: Andreea CHIRITESCUEastern Illinois University2424Measuring the Cost of Living 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or serv

2、ice or otherwise on a password-protected website for classroom use.1The Consumer Price Index Consumer price index (CPI)Measure of the overall level of pricesMeasure of the overall cost of goods and servicesBought by a typical consumerBureau of Labor Statistics 2015 Cengage Learning. All Rights Reser

3、ved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2Calculating CPI1. Fix the basket Which prices are most important to the typical

4、consumer Different weight 2. Find the prices At each point in time3. Compute the baskets cost Same basket of goods Isolate the effects of price changes 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license

5、 distributed with a certain product or service or otherwise on a password-protected website for classroom use.3Calculating CPI4. Chose a base year and compute the CPI Base year = benchmarkPrice of basket of goods and services in current yearDivided by price of basket in base yearTimes 1005. Compute

6、the inflation rate 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1001 year in CPI1 year

7、in CPI-2 year in CPI2 year in rate Inflation4Table 1 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for cla

8、ssroom use.Calculating the Consumer Price Index and the Inflation Rate: An ExampleThis table shows how to calculate the consumer price index and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and hamburgers.5Table 1 2015 Cengage Learning. All Rights Reserved. May

9、not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Calculating the Consumer Price Index and the Inflation Rate: An ExampleThis table shows ho

10、w to calculate the consumer price index and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and hamburgers.6The Consumer Price Index Inflation ratePercentage change in the price index From the preceding period Producer price index, PPIMeasure of the cost of a baske

11、t of goods and services bought by firmsChanges in PPI are often thought to be useful in predicting changes in CPI 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or

12、 service or otherwise on a password-protected website for classroom use.7Figure 1 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passw

13、ord-protected website for classroom use.The Typical Basket of Goods and ServicesThis figure shows how the typical consumer divides spending among various categories of goods and services. The Bureau of Labor Statistics calls each percentage the “relative importance” of the category.8The Consumer Pri

14、ce Index Problems in measuring the cost of livingSubstitution biasPrices do not change proportionatelyConsumers substitute toward goods that have become relatively less expensiveIntroduction of new goodsMore variety of goods Unmeasured quality changeChanges in quality 2015 Cengage Learning. All Righ

15、ts Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.9GDP deflator versus CPI GDP deflatorRatio of nominal GDP to real GDPRefl

16、ects prices of all goods & services produced domestically CPIReflects prices of goods & services bought by consumers 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain

17、 product or service or otherwise on a password-protected website for classroom use.10“The price may seem a little high, but you have to remember thats in todays dollars.”GDP deflator versus CPI GDP deflatorCompares the price of currently produced goods and servicesTo the price of the same goods and

18、services in the base year CPICompares price of a fixed basket of goods and servicesTo the price of the basket in the base year 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certa

19、in product or service or otherwise on a password-protected website for classroom use.11Figure 2 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherw

20、ise on a password-protected website for classroom use.Two Measures of InflationThis figure shows the inflation ratethe percentage change in the level of prices as measured by the GDP deflator and the consumer price index using annual data since 1965. Notice that the two measures of inflation general

21、ly move together.12Correcting Economic Variables Dollar figures from different times IndexationAutomatic correction by law or contractOf a dollar amountFor the effects of inflationCOLA: Cost of living allowance 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in

22、 whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Amount in todays dollarsPrice level todayAmount in year T dollarsPrice level in year T13Real and Nominal Interest Rates Nominal int

23、erest rateInterest rate as usually reported Without a correction for the effects of inflation Real interest rateInterest rate corrected for the effects of inflation = Nominal interest rate Inflation rate 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole

24、or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.14Interest rates in the U.S. Economy Nominal interest rateAlways exceeds the real interest rateU.S. economy has experienced rising consumer prices in every year Inflation is variableReal and nominal interest rates do not always move together Periods of deflationReal interest rate exceeds the nominal interest rate 2015 Cengage Learning. All Rights Reserved. May not be copied, scann