- Information
- AI Chat
Aplia Calculating inflation using a simple price index
Introduction to Macroeconomics (ECO1102)
University of Ottawa
Recommended for you
Preview text
Close Explanation Explanation: A price index is the cost of the market basket in the current year divided by the cost of the market basket in the base year, all multipled by 100. In 2013, the CSPI must be 100 because 2013 is the base year, so you're just dividing the market basket by itself and multiplying by 100. In 2014, you can calculate the CSPI in the following way: Similarly, in 2015 the CSPI is 150: Between 2013 and 2014, the CSPI increased by 20% . Between 2014 and 2015, the CSPI increased by 25% . Points: 1/1 Close Explanation Explanation: You can calculate the percentage change in the CSPI between 2013 and 2014 in the following way: Using similar calculations, you can find the inflation rate in the CSPI between 2014 and 2015: Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to university? Check all that apply. As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. A new mobile device for personal computing became available for purchase. Professors required each student to buy 10 notebooks, regardless of the price. Energy drinks became increasingly popular on university campuses between 2013 and 2015 due to significant improvements in flavour. Points: 0 / 1 Close Explanation Explanation: One reason that price indexes such as the CSPI overstate inflation is that they use a fixed basket of goods. In reality, when the price of a good increases, people tend to buy less of it. For example, during the period shown in this problem, the price of calculators rose dramatically, but if the characteristics of all the goods were held constant, you would expect students to buy fewer calculators as a result. Therefore, a measure of inflation that assumes that students would not reduce their consumption of calculators, even as their price rose, would overstate inflation. However, if students cannot alter their bundle—for example, because professors require them to buy 10 notebooks, regardless of the price—then the CSPI would be a more accurate description of the true cost of attending university. Another reason that price indexes overstate inflation is that they assume the quality of a good doesn't change from year to year. Therefore, if the price of something increases because of increases in quality, the price index would overstate the cost increase of that item. For example, it's reasonable to think that part of the price increase of the energy drinks was payment for the new improved flavour, not an increase in the price of the same energy drinks that were sold in 2013. Yet another reason that price indexes overstate inflation is that they don't account for the benefits of new goods. When new goods, like new mobile devices for personal computing, are introduced, consumers can spend their money on more things. As a result, the value of each dollar they have increases. Because the CSPI doesn't account for new goods, it underestimates what a dollar is worth when new goods are introduced and, thus, overestimates inflation.
Aplia Calculating inflation using a simple price index
Course: Introduction to Macroeconomics (ECO1102)
University: University of Ottawa
