Economy ch. 11 review

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Anonymous
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138963
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Economy ch. 11 review
Updated:
2012-03-01 17:41:20
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Chapter 11
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  1. consumer price index (CPI)
    a measurement of the overall cost of living for a typical consumer
  2. calculating cpi
    (current year cost of "market basket" / base year cost of "market basket" ) x 100
  3. 1st and 2nd top categories of spending according to CPI
    • 1. Housing about 40%
    • 2. Transportation 17 %
  4. producer price index
    • measures of cost of basket of goods and services bought by firms rather than consumers
    • useful to predict CPI bc: producers wish for consumers to pay for increase in cost of production
  5. 3 problems with cpi
    • 1.Substitution bias: change in price is not proportional across all basket goods -> shift in basket -> yet computed basket remains on fixed basket
    • 2. introduction of new goods:
    • C: greater variety
    • E: money is more valuable
    • CPI is even more inaccurate bc variety of goods can vary in dif. parts of country
    • 3. unmeasured quality change: dollar more valuable if it can buy higher quality elsewhere or in present rather than past

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