PRINCIPLES OF MACROECONOMICSText: Principles of Macroeconomics, N. Gregory Mankiw, Sixth Edition.
Instructor: Sue Guzek, Kansas State University Salina
Music: We Gonna Make You… By Troy “Trombone Shorty” Andrews and Orleans Avenue – Orleans and Claiborne
1
MEASURING THE COST
OF LIVING – PART A
CPI
WHAT IS CPI?
2
Overall cost
Of goods and
services
Bought by a typical
consumer
WHY CPI?
3
INFLATION
4
% change in price level from a previous period
Impacts economic policy
GDP = Current production
GDP Deflator measures inflation as
= Nominal GDP
Real GDP
X 100
CPI = Current purchases
Most common gauge of inflation
THE CPI BASKET FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full
service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Payments to governments: MV registration fees and tolls, water, sewer, sales and excise tax
Exclusions: income and SSI tax, investments,
Source: US Bureau of Labor Statistics: http://www.bls.gov/cpi/cpifaq.htm#Question_6 5
THE CPI BASKET
6
41%
17%
15%
7%
7%
6%
4%3%
CPI Percentages 2012
Housing
Transportation
Food and Beverage
Medical care
Education andcommunicationRecreation
Apparel
Other
HOW CPI IS CALCULATED
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1. Fix the basket
2. Find Prices
3. Compute Value
4. Choose base year
and compute CPI
5. Compute inflation
rate
2 frozen pizzas X $5 = $10
CPI = (Current Year price / base year price) X 100
Inflation Rate= ((CPI yr 2 – CPI yr 1)/CPI yr 1) X
100
EXAMPLE
8
• Fix the basket, Find Prices, Compute Value
Example: Food for a family of 4, 2 adults, 2 children,
Year Basket
Price
1980 $4350
2010 $9480
2011 $9830
2012 $10000
http://www.cnpp.usda.gov/Publications/FoodPlans/2012/CostofFoodJan2012.pdf
CPI = (Current year Price of basket/base year price ) X
100
4. Choose base year and compute index
Formula CPI
= 4350/4350 X 100 100
= 9480/4350 X 100 218
= 9830/4350 X 100 226
=10000/4350 X 100 230
$833 per month or a 2012 value of basket = $10,000
EXAMPLE SLIDE 2
9
1. Fix the basket
2. Find Prices
3. Compute Value
4. Choose base year and compute
index
5. Compute inflation
rate
Year CPI Formula % Increase
1980 100
2010 218
2011 226 =((226-218)/218)*100 3.7%
2012 230 =((230-226)/226)*100 1.7%
Inflation Rate= ((CPI yr 2 – CPI yr 1)/CPI yr 1) X 100
HISTORY - CPI
10
PROBLEMS WITH USING CPI
Substitution bias
Introduction of new
goods
Unmeasured quality
change
11
TERMS AND CONCEPTS
12
Consumer Price Index
Inflation rate
LEARNING OBJECTIVES
Explain how the Consumer Price Index
(CPI) is built and calculated
List the challenges with use CPI to
measure the cost of living
13
OTHER SOURCES
See also the insets in the Mankiw text
including
14
SOURCES
Principles of Macroeconomics, N. Gregory Mankiw, Sixth Edition: PowerPoint Slides prepared by: Andreea CHIRITESCU, Eastern Illinois University
US Bureau of Labor Statistics: http://www.bls.gov/cpi/cpifaq.htm#Question_6
US Dept of Agriculture: http://www.cnpp.usda.gov/Publications/FoodPlans/2012/CostofFoodJan2012.pdf
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