Thursday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 8 The Data22 of Macroeconomics
Chapter 24 of 36 Measuring The Cost of Living
Section 3 of 15
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Table 1 – An Example of Calculating the Consumer Price Index and the Inflation Rate
This table shows for a hypothetical economy how to calculate the consumer price index and the inflation rate in a situation where consumers buy only hot dogs and hamburgers.
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The consumer price index (CPI) is a measure of the cost of the goods (and services) bought by a typical consumer.
The Bureau of Labor Statistics (BLS) computes and reports the CPI each month.
Here we will discuss:
⦁ how the CPI is calculated
⦁ what problems arise in its measurement
⦁ how this index compares to the GDP deflator
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The BLS uses data of prices of thousands of goods to calculate the CPI and inflation rate.
Let's consider a simple economy where consumers buy only two goods, hot dogs and hamburgers.
Table 1 shows the five steps the BLS follows:
1. Establish the basket of goods
2. Find the price of each good for each year
3. Compute the basket's cost for each year
4. Choose a base year and compute the CPI
5. Compute the inflation rate
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⦁ Step 1 - Establish the basket of goods
Determine which prices are most important to the typical consumer.
If the typical consumer buys more hot dogs than hamburgers, 4 and 2, the price of hot dogs is more important than the price of hamburgers.
Therefore, price of hot dogs is given greater weight in measuring the cost of living.
The BLS sets these weights by surveying consumers to find the basket of goods the typical consumer buys.
In Table 1, the typical consumer buys a basket of four hot dogs and two hamburgers.
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⦁ Step 2 - Find the price of each good for each year
Find the prices of each of the goods in the basket at each time point.
Table 1 shows the prices of hot dogs and hamburgers over three years
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⦁ Step 3 - Compute the basket's cost for each year
Use the prices data to calculate the cost of the basket of goods each year.
Table 1 shows this calculation for each of the 3 years.
Note only the prices in this calculation change, content of basket does not change
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establish the basket of goods
shouhi basuketto o settei suru
Note, a shorter way to write shouhi is shōhi, but the ō with a macron dash is not easily entered on an English-set keyboard.