Explain why the changes in the cost-of-living index of an individual are different from the official cost-of-living index.
Explanation of Solution
The individual’s cost of living index will be related to their consumption of goods and services. Since the official cost of living index is calculated using the same method, to calculate the official cost of living index, the government will set a base year price to calculate the inflation. However, the individual may reduce or increase their consumption than the previous period, which would not directly reflect on the official cost of living index. If the price of wheat increases than the previous period, the cost of living for an individual who purchases more wheat than a typical household will increase more than the
Consumer price index (CPI): The consumer price index refers to the relative value of the goods and services to the value of the same basket in the base year. The consumer price index measures the price level of goods and services.
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Chapter 6 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
- The CPI for 2019 in the United States was 256, which means the typical market basket purchased that year would cost a. 156 percent more than the same market basket purchased in the base year b. 56 percent more than the same market basket purchased in the base year c. more than the same market basket purchased during any previous year d. 256 percent more than the same market basket purchased the previous year e. 156 percent more than the same market basket purchased the previous yeararrow_forwardConsumers of the economy purchase all primary products, manufacturing products and services shown in the table. Manufacturing products and services are all produced by the domestic economy. However, for each year, 3/4 of the primary products is imported, and 1/4 is produced domestically. Set 1973 as the base year.Find the % change in prices for primary products, manufacturing products and services, respectively, from 1973 to 1974. Find the CPI for both years. Calculate the corresponding inflation rate from 1973 to 1974. Find the nominal and real GDP for both years. Hence, find the GDP deflator for both years. Calculate the corresponding inflation rate from 1973 to 1974. The above table is set up in such a way to mimic the actual data of the inflation rates calculated from the CPI and the GDP deflator, respectively, for the US during the first oil crisis in 1973- 1974. Use your results to explain how and why the two numbers differ by such a wide margin during that period.arrow_forwardAs a first step in computing the consumer price index (CPI), a survey of consumers is done to determine the “basket of goods” purchased by a typical consumer. Suppose that 2009 is given as the base year and, consistent with the data shown in the table above, it was decided that the basket of goods in this economy should consist of one unit of food and two units of clothing. I. Using 2009 as the base year,what is the CPI in each year: 2009, 2010, and 2011? ii. What is the inflation rate in 2010 and 2011?arrow_forward
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- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning