ECON 202 Ch 8 smartbook

In 1990, the average price of a gallon of regular gasoline in the U.S. was $1.34. In 2013, the average price was $3.52. CPI in 1990 was 130.7 and the CPI in 2013 was 232.8. How much is a 1990 gallon of gas expressed in 2013 dollars?

$2.38

The consumer price index (CPI) is calculated by the Fed.

False

Indicate the accuracy trade-off(s) with the assumption that the market basket is fixed.

Fixed market baskets isolate price changes from behavior changes. In reality, price changes lead to changes in quantity consumed.

Why might it be useful to exclude food and energy prices from inflation measurements?

Food and energy prices tend to fluctuate greatly.

When new and/or improved goods become available, people change the types of goods and services they consume. This challenge to accuracy in CPI measurement is called

innovation.

Suppose you have a $15,000 car loan. If price levels are rising, then the real value of the debt

is shrinking over time.

Transaction costs undermine PPP because

it costs money to move goods from one place to another.

When the price of goods and services increases, people tend to reduce quantity consumed. If the market basket does not reflect this fact,

it will overstate the change in the cost of living.

A list of specific goods and services in fixed quantities that economists use to evaluate the cost of living across time and place is called a(n) __________.

market basket

In 2012, nominal GDP per capita in the U.S was $49,922. In Brazil, nominal GDP per capita was $12,079 the same year. Calculate the PPP-adjusted GDP for Brazil if the purchasing power of a given amount of dollars was 24% lower in the U.S. PPP-adjusted GDPBrazil = $- (Round to two decimal places)

15,893.42

Suppose that CPI in a given year equals 207. The year before, the CPI equaled 199. The inflation rate between the two years equals -% (Round to one decimal place.)

4

According to the Big Mac index, if PPP holds

Big Macs have the same real price in the U.S. and other countries.

The consumer price index (CPI) is calculated by the

Bureau of Labor Statistics (BLS).

If we assume inflation (rising prices), what is true of the consumer price index (CPI) for all years prior to the base year?

CPIprior year < CPIbase year

What is another name for indexed payments?

Cost-of-living adjustments

Suppose the Big Mac index between the U.S. and Ecuador is -31%. What does this imply about relative prices?

Dollars go further at a McDonald's in Ecuador than in the U.S. Prices in Ecuador are less than we would expect if PPP held.

Suppose the Big Mac index between the U.S. and Spain is 24%. What does this imply about relative prices?

Dollars go further at a McDonald's in the U.S. than in Spain. Prices in Spain are higher than we would expect if PPP held.

Which of the following price indexes does not use a fixed basket of goods and services?

GDP deflator

How does the BLS weigh changes in quality against changes in the price of goods and services in the market basket?

Hedonic quality adjustment

A measure that uses a broad market basket that tries to represent the cost of living across countries is called the _________ index (acronym).

ICP

What is true about the value of a dollar?

It varies based on location It changes as prices rise and fall It is greater in Iowa than it is in New York City

In 2013, a Big Mac cost $4.37 in the U.S. In Spain, a Big Mac cost 6.73 euros the same year. If the actual exchange rate of euros to dollars is 1.24, does PPP hold based on the Big Mac?

No. The exchange rate predicted by PPP is 1.54

Houses are less expensive in Laramie, WY than they are in Calabasas, CA, ceteris paribus. In this example, purchasing power parity (PPP) does not hold. Why?

Non-tradables

Why is selecting goods and services for the market basket problematic for the BLS?

Not all people enjoy the same goods and services.

Suppose leather riding boots cost only 25% of what they cost in the U.S. However, the Obama administration, in an attempt to protect domestic producers of leather products, imposes a 400% import tariff on leather riding boots from Canada. What is the result?

PPP does not hold due to trade restrictions.

Recalculating economic statistics to account for price variations across countries is called

PPP-adjustment.

The market basket approach is subject to which of the following flaws?

People change quantities in response to price changes.

Which of the following is generally true of prices and income?

Prices and income change at different rates across time and location.

- variables allow us to compare value (such as wages) over time.

Real

Two reasons for a variation in consumption over time are substitution and innovation.

True

In the United States, which of the following payments are most commonly indexed to inflation?

Social Security payments

Which of the following differentiates CPI from the GDP deflator?

The GDP deflator does not include goods produced abroad, CPI does.

Which of the following indexes tends to be an early predictor of consumer inflation?

The producer price index

Though it may undermine the concept of comparing a constant basket of goods, the BLS occasionally updates the items in the CPI market basket. Why?

To capture the cost of a certain standard of living. To more accurately measure the types of goods and services that are available in a given period

Which of the following explain(s) why purchasing power parity almost never holds?

Transaction costs Non-tradables Trade restrictions

How to measure changes over time and deciding which goods should be included are challenges faced by the Bureau of Labor Statistics when calculating the CPI.

True

What are two main challenges that the BLS faces when calculating the CPI?

Which goods should be contained in the basket. How to measure changes over time.

In order to evaluate how the price of all goods and services changes over time and place, analysts use

a market basket.

A measure that shows the amount of change in a market basket relative to a base year or base location is called

a price index.

PPP-________ suggests that poor countries are not as poor as the nominal GDP per capita figures suggest. (Use one word to fill in the blank.)

adjustment

Purchasing power parity (PPP)

almost never holds completely.

When a market basket uses specific goods and services in fixed quantities,

any change to the cost of the basket is the result of changes in price.

A measure that tracks changes in the cost of a market basket of goods and services consumed by a typical U.S. household is called the _________.

consumer price index

An inflation measure that does not include food or energy costs is called

core inflation.

People buy many goods and services. In light of this fact,

economists can still measure a change in the price of all goods.

In the base year, the value of the consumer price index (CPI)

equals 100.

Hedonic quality adjustment refers to

estimating what the price of a good would be without improved quality.

Another name for inflation that is measured using the CPI is

headline inflation.

When the price of goods and services ________, people tend to reduce quantity consumed. If the market basket does not reflect this fact, it will overstate the change in the cost of living.

increases

When payments are automatically increased in proportion to the cost of living, it is called _________ (one word).

indexing

In the state of Colorado, minimum wage changes each year at the rate of change of the Colorado CPI. This is an example of

indexing to inflation.

The size of the change in the overall price level is called the _________ rate.

inflation

When the cost of living varies across countries,

nominal GDP per capita means different things in different countries.

Price indexes can be used to deflate a ___________ variable and express it as a _________ variable.

nominal; real

When PPP fails because it is not possible to transport a good or service elsewhere, the failure is due to

non-tradables.

PPP-adjustment clarifies the fact that

poor countries are not as poor as the nominal GDP per capita figures suggest.

According to _________, purchasing power in different countries should be the same when stated in a common currency.

purchasing power parity

If the difference in sale price is small and the transaction costs are high,

purchasing power parity fails.

In theory, purchasing power in different countries should be the same when stated in a common currency. This describes

purchasing power parity.

When calculating the market basket we hold __________ constant and evaluate changes in __________.

quantity; price

Rather than calculating the exact goods and services each household consumes, the CPI

takes an average of a large cross section of U.S. consumers.

A simple (and very real) example of an index used to account for price differences across locations is

the Big Mac index.

The measure used for official international price comparisons is

the International Comparison Program.

A dollar is worth more in Greeley, CO (a small, largely agricultural city) than it is in Chicago, IL, because

the cost of living tends to be higher in big cities.

Economists evaluate changes in the price level in order to estimate

the inflation rate.

Suppose the inflation rate between 2005 and 2006 equals 5%. This means

the overall level of prices is 5% higher in 2006 than it was in 2005.

A measure of inflation that considers wholesale prices of inputs is called

the producer price index.

A primary function of price indexes is

to calculate inflation.

Economists use price indexes

to transform nominal variables into real variable.

Policies that aim to protect domestic industries from foreign competition increase the cost and difficulty associated with cross-border transactions. In this case PPP does not hold due to ______.

trade restrictions

Since most people prefer different goods and services, it is impossible to select a basket of goods and services that applies to everyone. As a result, the BLS uses a basket of goods purchased by

typical households.

The term "typical households" refers to

urban consumers.

In order to analyze the change in the overall cost of living, economists

use a single number that summarizes price changes of all goods.

Some criticize the market "basket approach" by indicating that people tend to alter consumption patterns as prices change. If we allow the basket to change,

we would capture the change in price AND quantity.