Econ 2101

The following statements are steps used to construct an index that describes price changes across locations. Rank them in sequence from first (top) to last (bottom).

1. Find the market basket that we can compare across countries. 2. Measure the good's prices in each country. 3. Calculate the cost of the basket in each country. 4. Build an index showing basket cost relative to a base.

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.

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

Hedonic quality adjustment

If the growth rate in nominal income is larger the the inflation rate (as measured by the change in the CPI or the GDP deflator), the real value of income has:

Increased since nominal income has grown faster the the price index

PPP-___________ suggests that poor countries are not as poor as the nominal GDP per capita figure suggest.

adjustment

In 1929, the CPI equaled 17.1 and in 1930, the CPI equaled 16.7. These data provide evidence of a period of:

deflation

The substitution bias in the CPI arises because the CPI:

is based on a fixed basket of goods and services.

A college graduate in 1972 found a job paying $7,200. The CPI was 41.8 in 1972. A college graduate in 2005 found a job paying $28,000. The CPI was 168 in 2005. The 2005 graduate's job paid ____ in nominal terms and ______ in real terms than the 1972 graduate's job.

more; less $7200 x (168/41.8) = $28,938

Year Salary CPI 1969 $20,520 36.7 1979 $43,265 72.6 1989 $85,529 124.0 1999 $135,250 166.6 2009 $170,844 214.5 Using the information in the table shown, what is the 1999 salary in 2009 dollars?

$174,136

In 1976, the cost of a movie was $4. In 2012, it's $9. If the CPI for 1976 is 56, and 228 for 2012, to find the real 2012 value of a 1976 movie, we would multiply its nominal value in 1976 by the ratio of:

(228/56)

Using the data in the table below, calculate the CPI and the inflation rate in each year, using 2010 as a base year. Year Cost of basket($) 2010 $20,000 2011 $21,650 2012 $22,800 2013 $26,250 2014 $28,835 2015 $32,800

CPI Inflation Rate 100.0 ---- 108.3 8.3% 114.0 5.3% 131.3 15.2% 144.2 9.8% 164.0 13.2%

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

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

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

ICP (international comparison program)

_______ variables allows us to compare value (such as wages) over time.

Real

Suppose the median household earned $9,243 in 1976 and $52,765 in 2016. During that time, also suppose the CPI rose from 48.2 to 214.68. a)The total growth rate in nominal median household income from 1976 to 2016 was b)The total growth rate in real median household income from 1976 to 2016 (use the value in 2016 years dollars in your computations) was

a) 470.9% b) 28.2%

Government survey takers determine that typical family expenditures each month in the year designated as the base year are as follows: 25 pizzas at $10 each Apartment rent, $600 per month Gasoline and car maintenance, $100 Phone service (basic service plus 10 long-distance calls), $50 In the year following the base year, the survey takers determine that pizzas have risen to $11 each, apartment rent is $640, gasoline and maintenance have risen to $120, and phone service has dropped in price to $40. a) Find the CPI in the subsequent year and the rate of inflation between the base year and the subsequent year. b) The family's nominal income rose by 5 percent between the base year and the subsequent year. Are they worse off or better off in terms of what their income is able to buy?

a) CPI is 107.5 Rate of inflation is 7.5% b) The family is worse off

Indicate whether the following goods have likely required a quality adjustment over time if they were included in the Consumer Price Index (CPI). a. Laptop computers: b. Cell phones: c. Salt: d. Televisions: e. Housing: f. Tennis rackets:

a. Yes b. Yes c. No d. Yes e. No f. Yes

Until Congress began to periodically raise benefit levels to adjust for inflation, the first recipients of Social Security checks: a) lost value over time, because the payments were not adjusted for inflation. b) received a fixed amount that caused their real income to decline. c) grew poorer over time, because the payments were nominal amounts. d) All of these statements are true.

d) All of these statements are true.

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

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

Hedonic quality adjustment refers to

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

An extremely high rate of inflation is called _____.

hyperinflation

One family earned an income of $28,000 in 1990. Over the next five years, their income increased by 15%, while the CPI increased by 15%. After five years, this family's nominal income ______, and their real income ______.

increased; did not change

If prices in the current year are higher on average than in the base year, real GDP in the current year ______ nominal GDP in the current year.

is less than

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

it will overstate the change of the cost of living.

Your father tells you he earned a salary of $45,000 a year in 1980. This salary figure is the:

nominal value of his salary in 1980.

Price indexes can be used to deflate a ________ variable and express it as a _______ variable.

nominal; real

The CPI is based on the basket of goods and services purchased by consumers in cities

of 2500 people or more

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car also includes additional safety features. In this situation the CPI will tend to _____ inflation as a result of _____ bias.

overstate; quality/technological improvement

When calculating changes in the value of a market basket, __________ is held constant. When calculating changes in real GDP, ____________is held constant.

quantity; price

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 41.8. The cost of a gallon of gasoline is $2.15 in 2020 when the CPI equaled 257. The real cost of a gallon of gasoline between 1972 and 2020:

remained constant $0.35 x (257/41.8) = $2.15

If the prices included in CPI increased by 3% on average, and your nominal wage also increased by 3%, then your relative income has ______ and inflation _____.

remained constant; has occurred

Because Congress fixes the minimum wage in nominal terms, when there is inflation, the nominal minimum wage _____ and the real minimum wage _____.

remains constant; falls

If the Consumer Price Index was 104 in 2012, it means that on average consumer prices _________ by _________ percent between the base year and 2012.

rose; 4

Two reasons for variation in consumption over time are _______ and _______.

substitution; innovation

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

the Big Mac index

The measure used for official international price comparison is

the International Comparison Program

Economists use price indexes

to transform nominal variables into real variables.

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.

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

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