1. PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University Measuring the Cost of Living 1 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2. The Consumer Price Index Consumer price index (CPI) –Measure of the overall level of prices –Measure of the overall cost of goods and services – Bought by a typical consumer –Bureau of Labor Statistics 2 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Calculating CPI 1.Fix the basket –Which prices are most important to the typical consumer –Different weight 2.Find the prices –At each point in time 3.Compute the basket’s cost –Same basket of goods –Isolate the effects of price changes 3 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Calculating CPI 4.Chose a base year and compute the CPI –Base year = benchmark Price of basket of goods & services in current year Divided by price of basket in base year Times 100 5.Compute the inflation rate 4 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Table 1 5 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Calculating the Consumer Price Index and the Inflation Rate: An Example This table shows how to calculate the consumer price index and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and hamburgers.

6. Table 1 6 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Calculating the Consumer Price Index and the Inflation Rate: An Example This table shows how to calculate the consumer price index and the inflation rate for a hypothetical economy in which consumers buy only hot dogs and hamburgers.

7. Copyright©2004 South-Western Fixed Basket: Cost of living in year t : Cost of living in the base year:

8. The Consumer Price Index Inflation rate –Percentage change in the price index From the preceding period Producer price index, PPI –Measure of the cost of a basket of goods and services bought by firms –Changes in PPI are often thought to be useful in predicting changes in CPI 8 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Figure 1 9 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Typical Basket of Goods and Services This figure shows how the typical consumer divides spending among various categories of goods and services. The Bureau of Labor Statistics calls each percentage the “relative importance” of the category.

10. Copyright©2004 South-Western 10 CPI 查價與編算方式 ( 主計處資訊 ) 權數之產生：  市場上流通之商品與服務種類繁多，各國實務 上均根據家庭收支調查資料選取重要且具代表 性之項目定期查價，各項消費支出占總消費支 出之比重即為其權數 ( 我國每 5 年計算一次 ) 。 價格資料之蒐集程序：  95 年基期 CPI 共選查 424 個項目，每月定期定 點調查約 22,000 項次。價格資料由各縣市調查 員實地訪查，經審核、編算後，於次月 5 日公 布指數。

11. Copyright©2004 South-Western 11 只查消費性商品 ( 例如手機 ) 及服務 ( 如美髮 ) 不含健保費、所得稅 ( 支出與享用無對等報償關係 ) 不含房地產、股票、債券 ( 投資或儲蓄性質 ) 房租 ( 只查住家用，不查商辦用租金 ) 包含車輛通行費等使用者付費之規費 CPI 查價範圍 ( 主計處資訊 )

12. Copyright©2004 South-Western 12 CPI 分類－特殊分類 ( 主計處資訊 ) 核心物價 指 數權數 我國不含新鮮蔬果、水產及能源之 CPI 總指數 86.7 % 日本不含生鮮食物之 CPI 總指數 95.5 % 南韓不含食物之 CPI 總指數 72.9 % 美國不含食物及能源之 CPI 總指數 80.2 %  剔除易受偶發性因素 ( 颱風戰爭 ) 影響價格的商品  剔除易受偶發性因素 ( 颱風、戰爭 ) 影響價格的商品  能源係指電費燃氣及油料費  能源係指電費、燃氣及油料費

13. Copyright©2004 South-Western 13 近年來 CPI 變動概況 ( 主計處資訊 )

14. 台灣 CPI 年增率 ( 單位 = 百分點 ) 總指數食物類衣著類居住類交通通 訊 醫孳保 健 教養娛 樂 2009-0.86-0.44-0.74-0.34-4.000.60-1.78 20100.960.621.690.462.780.66-0.05 20111.422.262.880.861.411.820.52 20121.934.162.521.130.440.860.68

15. Copyright©2004 South-Western 15  消費者物價指數 (Consumer Price Index,CPI)  衡量一般家庭購買消費性商品及服務價格 水準的變動情形  躉售物價指數 (Wholesale Price Index, WPI)  衡量企業間商品交易價格水準的變動情形 物價指數的種類 ( 主計處資訊 )

16. Copyright©2004 South-Western 16 躉售物價 (WPI) 國產內銷 出口 企業企業 物價指數的關聯 進口原料 家庭家庭 消費者物價 (CPI) 進口棉花 棉紗 棉布 成衣 百貨服飾 店 (紗廠) (紗廠) (紗廠) (紗廠) (布廠) (布廠) (布廠) (布廠) ( 成衣 廠 ) ( 成衣 廠 ) 生產加工 進口成品

17. The Consumer Price Index Problems in measuring the cost of living –Substitution bias Prices do not change proportionately Consumers substitute toward goods that have become relatively less expensive –Introduction of new goods More variety of goods –Unmeasured quality change Changes in quality 17 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. GDP deflator versus CPI GDP deflator –Ratio of nominal GDP to real GDP –Reflects prices of all goods & services produced domestically CPI –Reflects prices of goods & services bought by consumers 18 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. GDP deflator versus CPI GDP deflator –Compares the price of currently produced goods and services To the price of the same goods and services in the base year CPI –Compares price of a fixed basket of goods and services To the price of the basket in the base year 19 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. Figure 2 20 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Two Measures of Inflation This figure shows the inflation rate—the percentage change in the level of prices— as measured by the GDP deflator and the consumer price index using annual data since 1965. Notice that the two measures of inflation generally move together.

21. Correcting Economic Variables Dollar figures from different times Indexation –Automatic correction by law or contract –Of a dollar amount –For the effects of inflation –COLA Cost of living allowance 21 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Copyright©2004 South-Western Adjusting Nominal Values by price indexes Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times. $X in year A equals

23. Copyright©2004 South-Western How Much did Babe Ruth Earn? Babe Ruth: MLB Career: 1914—1935 Salary in 1931=$80,000

24. Copyright©2004 South-Western How Much did Babe Ruth Earn? Do the following to convert (inflate) Babe Ruth’s wages in 1931 to dollars in 2001:

25. Copyright©2004 South-Western All Time Box Office (Unadjusted) source: boxofficemojo.com TitleMillions USD 1Avatar (2009)$761 2Titanic (1997)$601 3The Dark Knight (2008)$533 4Star Wars (1977)$461 5Shrek 2 (2004)$441 6ET (1982)$435 7Star Wars: Episode I (1999)$431 8Pirates of the Caribbean (2006)$423 9Toy Story 3 (2010)$415 10Spider Man (2002)$403

26. Copyright©2004 South-Western All Time Box Office (Adjusted for Ticket Price Inflation) TitleMillion USD 1Gone with the Wind (1939)$1,618 2Star Wars (1977)$1,427 3The Sound of Music (1965)$1,141 4ET (1982)$1,136 5The Ten Commandments (1956)$1,049 6Titanic (1997)$1,028 7Jaws (1975)$1,026 8Doctor Zhivago (1965)$994 9The Exorcist (1973)$886 10Snow White and the Seven Dwarfs (1937)$873

27. Real and Nominal Interest Rates Nominal interest rate –Interest rate as usually reported –Without a correction for the effects of inflation Real interest rate –Interest rate corrected for the effects of inflation = Nominal interest rate – Inflation rate 27 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Interest rates in the U.S. Economy Nominal interest rate –Always exceeds the real interest rate –U.S. economy has experienced rising consumer prices in every year Inflation is variable –Real and nominal interest rates do not always move together Periods of deflation –Real interest rate exceeds the nominal interest rate 28 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. Figure 3 29 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real and Nominal Interest Rates This figure shows nominal and real interest rates using annual data since 1965. The nominal interest rate is the rate on a 3-month Treasury bill. The real interest rate is the nominal interest rate minus the inflation rate as measured by the consumer price index. Notice that nominal and real interest rates often do not move together.