Chapter 24 Measuring the Cost of Living

Measuring the Cost of Living 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.

24.1 THE CONSUMER PRICE INDEX The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The Bureau of Labor Statistics reports the CPI each month. It is used to monitor changes in the cost of living over time.

24.1 THE CONSUMER PRICE INDEX When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.

24.1.1 How the Consumer Price Index Is Calculated Fix the Basket: Determine what prices are most important to the typical consumer. The Bureau of Labor Statistics (BLS) identifies a market basket of goods and services the typical consumer buys. The BLS conducts monthly consumer surveys to set the weights for the prices of those goods and services.

24.1.1 How the Consumer Price Index Is Calculated Find the Prices: Find the prices of each of the goods and services in the basket for each point in time.

24.1.1 How the Consumer Price Index Is Calculated Compute the Basket’s Cost: Use the data on prices to calculate the cost of the basket of goods and services at different times.

24.1.1 How the Consumer Price Index Is Calculated Choose a Base Year and Compute the Index: Designate one year as the base year, making it the benchmark against which other years are compared. Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100.

24.1.1 How the Consumer Price Index Is Calculated Compute the inflation rate: The inflation rate is the percentage change in the price index from the preceding period.

24.1.1 How the Consumer Price Index Is Calculated The Inflation Rate The inflation rate is calculated as follows:

Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western

Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western

Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western

Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western

Table 1 Calculating the Consumer Price Index and the Inflation Rate: An Example Copyright©2004 South-Western

24.1.1 How the Consumer Price Index Is Calculated Calculating the Consumer Price Index and the Inflation Rate: Another Example Base Year is 2002. Basket of goods in 2002 costs $1,200. The same basket in 2004 costs $1,236. CPI = ($1,236/$1,200)  100 = 103. Prices increased 3 percent between 2002 and 2004.

FYI: What’s in the CPI’s Basket? 16% Food and beverages 41% Housing 17% Transportation 6% Education and communication Medical care 6% Recreation 6% Apparel 4% Other goods and services 4%

CONSUMPTION AND SAVING APC Consumption / Disposable Income APS Saving / Disposable Income MPC Change in Consumption Change in Disposable Income MPS Change in Saving Change in Disposable Income

GLOBAL PERSPECTIVE Average Propensities to Consume, .80 .85 .90 .95 1.0 .986 .976 .972 .940 .907 .873 .869 .842 GLOBAL PERSPECTIVE Average Propensities to Consume, Selected Nations, 1999 Statistical Abstract of the United States, 2000 Canada United States Netherlands United Kingdom Germany Italy Japan France

24.1.2 Problems in Measuring the Cost of Living The CPI is an accurate measure of the selected goods that make up the typical bundle, but it is not a perfect measure of the cost of living.

24.1.2 Problems in Measuring the Cost of Living Substitution bias Introduction of new goods Unmeasured quality changes

24.1.2 Problems in Measuring the Cost of Living Substitution Bias The basket does not change to reflect consumer reaction to changes in relative prices. Consumers substitute toward goods that have become relatively less expensive. The index overstates the increase in cost of living by not considering consumer substitution.

24.1.2 Problems in Measuring the Cost of Living Introduction of New Goods The basket does not reflect the change in purchasing power brought on by the introduction of new products. New products result in greater variety, which in turn makes each dollar more valuable. Consumers need fewer dollars to maintain any given standard of living.

24.1.2 Problems in Measuring the Cost of Living Unmeasured Quality Changes If the quality of a good rises from one year to the next, the value of a dollar rises, even if the price of the good stays the same. If the quality of a good falls from one year to the next, the value of a dollar falls, even if the price of the good stays the same. The BLS tries to adjust the price for constant quality, but such differences are hard to measure.

24.1.2 Problems in Measuring the Cost of Living The substitution bias, introduction of new goods, and unmeasured quality changes cause the CPI to overstate the true cost of living. The issue is important because many government programs use the CPI to adjust for changes in the overall level of prices. The CPI overstates inflation by about 1 percentage point per year.

24.1.3 The GDP Deflator versus the Consumer Price Index The GDP deflator is calculated as follows:

24.1.3 The GDP Deflator versus the Consumer Price Index The BLS calculates other prices indexes: The index for different regions within the country. The producer price index, which measures the cost of a basket of goods and services bought by firms rather than consumers.

24.1.3 The GDP Deflator versus the Consumer Price Index Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. There are two important differences between the indexes that can cause them to diverge.

24.1.3 The GDP Deflator versus the Consumer Price Index The GDP deflator reflects the prices of all goods and services produced domestically, whereas... …the consumer price index reflects the prices of all goods and services bought by consumers.

24.1.3 The GDP Deflator versus the Consumer Price Index The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year (only occasionally does the BLS change the basket)... …whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

Figure 2 Two Measures of Inflation Percent per Year 15 CPI 10 GDP deflator 5 1965 1970 1975 1980 1985 1990 1995 2000 Copyright©2004 South-Western

24.2. CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times.

24.2.1 Dollar Figures from Different Times Do the following to convert (inflate) Babe Ruth’s wages in 1931 to dollars in 2001:

Table 2 The Most Popular Movies of All Times, Inflation Adjusted Copyright©2004 South-Western

24.2.2 Indexation When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.

24.2.3 Real and Nominal Interest Rates Interest represents a payment in the future for a transfer of money in the past.

24.2.3 Real and Nominal Interest Rates The nominal interest rate is the interest rate usually reported and not corrected for inflation. It is the interest rate that a bank pays. The real interest rate is the nominal interest rate that is corrected for the effects of inflation.

24.2.3 Real and Nominal Interest Rates You borrowed $1,000 for one year. Nominal interest rate was 15%. During the year inflation was 10%. Real interest rate = Nominal interest rate – Inflation = 15% - 10% = 5%

Figure 3 Real and Nominal Interest Rates (percent per year) 15 10 Nominal interest rate 5 Real interest rate –5 1965 1970 1975 1980 1985 1990 1995 2000 Copyright©2004 South-Western

Summary The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices in the economy. The percentage change in the CPI measures the inflation rate.

Summary The consumer price index is an imperfect measure of the cost of living for the following three reasons: substitution bias, the introduction of new goods, and unmeasured changes in quality. Because of measurement problems, the CPI overstates annual inflation by about 1 percentage point.

Summary The GDP deflator differs from the CPI because it includes goods and services produced rather than goods and services consumed. In addition, the CPI uses a fixed basket of goods, while the GDP deflator automatically changes the group of goods and services over time as the composition of GDP changes.

Summary Dollar figures from different points in time do not represent a valid comparison of purchasing power. Various laws and private contracts use price indexes to correct for the effects of inflation. The real interest rate equals the nominal interest rate minus the rate of inflation.

Questions for Reviews Chapter 24 Measuring the Cost of Living

1、你认为下列哪一项对消费物价指数影响大：鸡肉价格上升10%，还是鱼子酱价格上升10%？为什么？ 2、CPI的概念？描述使消费物价指数成为衡量生活费用的一个不完善指标的三个问题。 答2：消费物价指数的目的是衡量生活费用的变动，但消费物价指数并不是生活费用的完美衡量指标。因为它存在三个难以解决的问题：（1）替代倾向；（2）新产品的引进；（3）无法衡量质量的变动。 3、如果海军潜艇的价格上升了，对消费物价指数影响大，还是对GDP平减指数影响大？为什么？

4、在长期中，糖果的价格从0.10美元上升到0.60美元。在同一时期中，消费物价指数从150上升到300。根据整体通货膨胀进行调整后，糖果的价格变动了多少？ 答4：根据整体通货膨胀进行调整后，糖果的价格变动了0.4美元。 5、解释名义利率和实际利率的含义。它们如何相关？ 答5：名义利率是银行所支付的利率。实际利率是根据通货膨胀校正后的利率。 名义利率和实际利率的关系可写成： 实际利率＝名义利率－通货膨胀率

Ch.24 Problems and Applications (Mankiw-ch.24, Prob.4, p532.) 1994 年开始，环境控制法要求汽油中加入一种新的添加剂以减少空气污染。这个规定提高了汽油的成本。劳工统计局(BLS)确定这种成本增加代表着质量提高。 在这种决定为既定时 , 汽油成本增加会提高 CPI 吗 ? 支持劳工统计局决定的理由是什么 ? 支持另一种决策的理由是什么 ?

4.1994 年开始，环境控制法要求汽油中加入一种新的添加剂以减少空气污染。这个规定提高了汽油的成本。劳工统计局(BLS)确定这种成本增加代表着质量提高。 (Mankiw-ch.24, Prob.4, p532.) 在这种决定为既定时 , 汽油成本增加会提高 CPI 吗 ? 答 : 在这种决定为既定时 , 汽油成本增加会提高 CPI, 因为汽油成本提高后增加了汽油的市场价格. 支持劳工统计局决定的理由是什么 ? 支持另一种决策的理由是什么 ? 答 : 因为汽油成本提高意味着空气污染减少，人们可以呼吸到更清新的空气，有更健康的生活环境，代表着消费者福利的提高，而这一点是用 CPI 无法衡量的。支持另一种决策的理由是汽油价格上升会使人们收入的实际购买力下降 , 降低美元的实际价值。

Ch.24 Problems and Applications (Mankiw-ch.24, Prob.5, p533.) 5. 用以下每一种情况说明在编制 CPI 中会出现什么问题？并解释之。 a.索尼牌随身听的发明 b. 汽车气囊的引进 c. 由于个人电脑价格下降而使购买量增加 d. 每包早餐麦片中的分量增加了 e.在汽油价格上升后更多地用节油车

(Mankiw-ch.24, Prob.5) 5. 5. 用以下每一种情况说明在编制 CPI 中会出现什么问题？并解释之。 答:当汽车气囊引进时,消费者又多了一种可供选择的物品,更多的选择使每一美元更值钱,但是由于CPI是根据固定不变的一篮子物品计算的,因此CPI无法反映货币购买力的这种变化。

c.由于个人电脑价格下降而使购买量增加 答:消费者对个人电脑价格下降的反应是增加购买量,但在计算CPI时,是用固定的一篮子物品,实际上是假设消费者仍然购买和以前同样数量而现在变得便宜的个人电脑。由于这个原因,消费物价指数所衡量的生活 费用的下降少于消费者实际感觉到的。 d.每包早餐麦片中的分量增加了 答:如果每包早餐麦片的价格未变而分量增加了，说明每包早餐麦片的质量变好了，并且一美元的价值也上升了。尽管劳工统计局想尽其最大努力来考虑早餐麦片的质量变动，但是仍然难以衡量质量。 e.在汽油价格上升后更多地用节油车 答:消费者对汽油价格上升的反应自然是更多地用节油车，因为可以降低生活费用。但劳工统计局在计算CPI时用固定的一篮子物品，实际上CPI所衡量的生活费用的增加就大于消费者实际感觉到的。

b)By what percentage did the wage rise? 工资上涨的百分比是多少？ (Mankiw-Ch.24, Prob.6, p533) The New York Times cost $0.15 in 1970 and $0.75 in 2000. The average wage in manufacturing was $3.36 per hour in 1970 and $14.26 in 2000.　(1970年每份《纽约时报》价值0.15美元，而1999年是0.75美元。1970年制造业平均工资是每小时3.36美元，1999年是14.26美元.) a) By what percentage did the price of a newspaper rise? 　报纸价格上升的百分比是多少？ b)By what percentage did the wage rise? 　工资上涨的百分比是多少？ c)In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?　在每年中，工人分别要工作多少分钟赚的钱才够买一份报纸。 d)Did workers’ purchasing power in terms of newspapers rise or fall?根据报纸来计算，工人的购买力是上升了，还是下降了？

a) By what percentage did the price of a newspaper rise? (Mankiw-Ch.24, Prob.6, p533) The New York Times cost $0.15 in 1970 and $0.75 in 2000. The average wage in manufacturing was $3.36 per hour in 1970 and $14.26 in 2000.　 a) By what percentage did the price of a newspaper rise? The price of a newspaper rise b)By what percentage did the wage rise? The wage rise

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?根据报纸来计算，工人的购买力是上升了，还是下降了？ Obviously, workers’ purchasing power in terms of newspapers fall.