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    Chapter 24 - Measuring The Living Cost

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    Minh Anh
    This document discusses several concepts and applications related to measuring inflation and the cost of living: 1. It provides an example of calculating price changes and inflation rates for different vegetables between 2010 and 2011 using a Consumer Price Index approach. 2. It discusses how to calculate percentage price changes and inflation rates for different goods using data from 2010 to 2012. 3. It presents a scenario about the consumption and prices of karaoke machines and CDs in a small nation from 2011 to 2012, and how to calculate the inflation rate using both CPI and GDP deflator methods. 4. It asks how different situations like new technologies, product changes, and consumer substitutions relate to challenges in constructing an accurate Consumer

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    Chapter 24 - Measuring The Living Cost

    Uploaded by

    Minh Anh
    41 views2 pages
    This document discusses several concepts and applications related to measuring inflation and the cost of living: 1. It provides an example of calculating price changes and inflation rates for different vegetables between 2010 and 2011 using a Consumer Price Index approach. 2. It discusses how to calculate percentage price changes and inflation rates for different goods using data from 2010 to 2012. 3. It presents a scenario about the consumption and prices of karaoke machines and CDs in a small nation from 2011 to 2012, and how to calculate the inflation rate using both CPI and GDP deflator methods. 4. It asks how different situations like new technologies, product changes, and consumer substitutions relate to challenges in constructing an accurate Consumer

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    Chapter 24_Measuring the living cost

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    This document discusses several concepts and applications related to measuring inflation and the cost of living: 1. It provides an example of calculating price changes and inflation rates for different vegetables between 2010 and 2011 using a Consumer Price Index approach. 2. It discusses how to calculate percentage price changes and inflation rates for different goods using data from 2010 to 2012. 3. It presents a scenario about the consumption and prices of karaoke machines and CDs in a small nation from 2011 to 2012, and how to calculate the inflation rate using both CPI and GDP deflator methods. 4. It asks how different situations like new technologies, product changes, and consumer substitutions relate to challenges in constructing an accurate Consumer

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    41 views2 pages

    Chapter 24 - Measuring The Living Cost

    Uploaded by

    Minh Anh
    This document discusses several concepts and applications related to measuring inflation and the cost of living: 1. It provides an example of calculating price changes and inflation rates for different vegetables between 2010 and 2011 using a Consumer Price Index approach. 2. It discusses how to calculate percentage price changes and inflation rates for different goods using data from 2010 to 2012. 3. It presents a scenario about the consumption and prices of karaoke machines and CDs in a small nation from 2011 to 2012, and how to calculate the inflation rate using both CPI and GDP deflator methods. 4. It asks how different situations like new technologies, product changes, and consumer substitutions relate to challenges in constructing an accurate Consumer

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    Chapter 24: Measuring the cost of living

    Problems and Applications

    2. The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In
    2010, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500
    carrots for $50. In 2011, they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for
    $120, and 500 carrots for $100.
    a. Calculate the price of each vegetable in each year.
    b. Using 2010 as the base year, calculate the CPI for each year.
    c. What is the inflation rate in 2011?
    3. Suppose that people consume only three goods, as shown in this table:

    a. What is the percentage change in the price of each of the three goods?
    b. Using a method similar to the consumer price index, compute the percentage change in the
    overall price level.
    c. If you were to learn that a bottle of Gatorade increased in size from 2011 to 2012, should
    that information affect your calculation of the inflation rate? If so, how?
    d. If you were to learn that Gatorade introduced new flavors in 2012, should that information
    affect your calculation of the inflation rate? If so, how?

    5. A small nation of ten people idolizes the TV show American Idol. All they produce and
    consume are karaoke machines and CDs, in the following amounts:

    a. Using a method similar to the consumer price index, compute the percentage change in the
    overall price level. Use 2011 as the base year, and fix the basket at 1 karaoke machine and 3
    CDs.
    b. Using a method similar to the GDP deflator, compute the percentage change of the overall
    price level. Also use 2011 as the base year.
    c. Is the inflation rate in 2012 the same using the two methods? Explain why or why not.

    1
    6. Which of the problems in the construction of the CPI might be illustrated by each of the
    following situations? Explain.
    a. the invention of the iPod
    b. the introduction of air bags in cars
    c. increased personal computer purchases in response to a decline in their price
    d. more scoops of raisins in each package of Raisin Bran
    e. greater use of fuel-efficient cars after gasoline prices increase

    7. The New York Times cost $0.15 in 1970 and $2.00 in 2009. The average wage in
    manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.
    a. By what percentage did the price of a newspaper rise?
    b. By what percentage did the wage rise?
    c. In each year, how many minutes does a worker have to work to earn enough to buy a
    newspaper?
    d. Did workers’ purchasing power in terms of newspapers rise or fall?

    8. The chapter explains that Social Security benefits are increased each year in proportion to
    the increase in the CPI, even though most economists believe that the CPI overstates actual
    inflation.
    a. If the elderly consume the same market basket as other people, does Social Security provide
    the elderly with an improvement in their standard of living each year? Explain.
    b. In fact, the elderly consume more healthcare compared to younger people, and healthcare
    costs have risen faster than overall inflation. What would you do to determine whether the
    elderly are actually better off from year to year?

    10. 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?
    b. Does the lender gain or lose from this unexpectedly high inflation? Does the borrower gain
    or lose?
    c. 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?

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