FTC1 Chapter 7

Constructing the CPI is a huge operation that costs millions of dollars and involves what three stages?

1. Selecting the CPI market basket, 2. Conducting the monthly price survey, and 3. Calculating the CPI

The CPI calculation has what three steps?

1.Find the cost of the CPI market basket at base period prices, 2. Find the cost of the CPI market basket at current period prices, and 3. Calculate the CPI for the base period and the current period

What is the difference between the nominal and real wage rates?

Because we measure the real wage rate in constant base period dollars, a change in the real wage rate measures the change in the quantity of goods and services that an hour's work can buy. In contrast, a change in the nominal wage rate measures a combination of a change in the quantity of goods and services that an hour's work can buy and a change in the price level. So the real wage rate removes the effects of inflation from the changes in the nominal wage rate.

Avoiding bias in the CPI is important for what two main reasons?

Bias leads to distortion of private contracts and increases in government outlays and decreases in taxes

A measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services?

Consumer Price Index (CPI)

The annual percentage change in the PCE price index excluding the prices of food and energy?

Core inflation rate

A measure of the change in the amount of money that people need to spend to achieve a given standard of living?

Cost of living index (CPI is sometimes called this)

A situation in which the price level is falling and the inflation rate is negative?

Deflation

The CPI is not a perfect measure of the cost of living (value of money) for what two broad reasons?

First, the CPI does not try to measure all the changes in the cost of living and second, even those components of the cost of living that are measured by the CPI are not always measured accurately

What are the two key differences between the GDP price index and the CPI that result in different estimates of the price level and inflation rate?

First, the GDP price index uses the prices of all the goods and services in GDP—consumption goods and services, capital goods, government goods and services, and export goods and services—while the CPI uses prices of consumption goods and services only. Second, the GDP price index weights each item using information about current quantities. In contrast, the CPI weights each item using information from a past Consumer Expenditure Survey. But because of the breadth of the items that the GDP price index includes, it is not an alternative to the CPI as a measure of the cost of living.

An average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices?

GDP price index, also called GDP deflator

The percentage change in the price level from one year to the next?

Inflation rate

The potential sources of bias in the CPI are?

New goods bias, Quality change bias, Commodity substitution bias, and Outlet substitution bias

The dollar amount of interest expressed as a percentage of the amount loaned?

Nominal interest rate

The average hourly wage rate measured in current dollars?

Nominal wage rate

An average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices?

PCE price index (Personal Consumption Expenditures)

The goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate?

Real interest rate

The average hourly wage rate measured in the dollars of a given reference base year?

Real wage rate

A period for which the CPI is defined to equal 100. Currently, the period is 1982-1984?

Reference base period

A real value is one that is expressed in the dollars of?

a given year

Why is the real wage rate a significant economic variable?

because it measures the real reward for labor, which is a major determinant of the standard of living. The real wage rate is also significant because it measures the real cost of labor services, which influences the quantity of labor that firms are willing to hire.

A nominal value is one that is expressed in?

current dollars

When the price level rises rapidly, the inflation rate is high; when the price level rises slowly, the inflation rate is low; and when the price level is falling, the inflation rate is?

negative

The purpose of the CPI is to measure what?

the cost of living or what amounts to the same thing, the value of money