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MEASURING THE COST OF LIVING - Coggle Diagram
MEASURING THE COST OF LIVING
Correcting economics variables for the effects of inflation
Dollar figures from different times
Indexation
Real and nominal Interest rates
Definition
Inflation refers to a situation in which the economy's overall price level is rising
The inflation rate is the percentage change in the price level from the previous period
The GDP deflator vs CPI
The producer price index, which measures the cost of a basket of goods and services bought by firms rather than consumers
GDP deflator = NGDP / RGDP X 100
How the consumer Price Index is calculated
Fix the basket
Compute the baskets cost
Choose a base year and compute the index
Find the prices
Compute the inflation rate
CPI in Y2 - CPI in Y1 / CPI in Y1 X 100
The consumer price index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
When the CPI rises, the typical family has to send more dollars to maintain the same standard of living
Problems in measuring the cost of living
Substitution bias
Introduction of new goods
Unmeasured quality changes