Global Economy
1. Measuring the Cost of Living
1) Questions for Review # 2
Questions: Describe the three problems that make the consumer price index an imperfect measure of the cost of living.
Answer: The 1st problem is called substitution bias. Consumers substitute toward goods that have become relatively less expensive. However CPI is based on a fixed basket of goods and it ignores the possibility of consumer substitution. The 2nd problem is the introduction of new goods. This means that consumers have more choices and each dollar is worth more when new products are introduced. Because of the same reason for first one, CPI does not reflect the increase in the value of the dollar. The 3rd problem is unmeasured quality change. Normally BLS adjusts the price of the goods when its quality is change. Despite these efforts, changes in quality remain a problem because quality is so hard to measure.
2) Questions for Review # 5
Questions: Explain the meaning of nominal interest rate and real interest rate. How are they related?
Answer: Nominal interest means rate that it is a measurement of change in dollars amount. The interest rate corrected for inflation is called real interest rate. The relation between these 2 rates is as follows:
Real interest rate = Nominal interest rate – Inflation rate rises over time.
So real interest rate show us how fast our purchasing power rises
3) Problems and Applications # 7
Questions: The New York Times cost $0.15 in 1970 and $2.00 in 2009. The average wage in manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.
a. By what percentage did the price of a newspaper rise?
Answer: 1,233.3%
Formula: ($2.00 / $0.15 – 1) x 100% = 1,233.3%
b. By what percentage did the wage rise?
Answer: 532.2%
Formula: ($20.42 / $3.23 – 1) x 100% = 532.2%
c. In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?
Answer: 2.79 minutes in 1970 and 5.88 minutes in 2009
Formula: ($0.15 / $3.23) x 60
1) Questions for Review # 2
Questions: Describe the three problems that make the consumer price index an imperfect measure of the cost of living.
Answer: The 1st problem is called substitution bias. Consumers substitute toward goods that have become relatively less expensive. However CPI is based on a fixed basket of goods and it ignores the possibility of consumer substitution. The 2nd problem is the introduction of new goods. This means that consumers have more choices and each dollar is worth more when new products are introduced. Because of the same reason for first one, CPI does not reflect the increase in the value of the dollar. The 3rd problem is unmeasured quality change. Normally BLS adjusts the price of the goods when its quality is change. Despite these efforts, changes in quality remain a problem because quality is so hard to measure.
2) Questions for Review # 5
Questions: Explain the meaning of nominal interest rate and real interest rate. How are they related?
Answer: Nominal interest means rate that it is a measurement of change in dollars amount. The interest rate corrected for inflation is called real interest rate. The relation between these 2 rates is as follows:
Real interest rate = Nominal interest rate – Inflation rate rises over time.
So real interest rate show us how fast our purchasing power rises
3) Problems and Applications # 7
Questions: The New York Times cost $0.15 in 1970 and $2.00 in 2009. The average wage in manufacturing was $3.23 per hour in 1970 and $20.42 in 2009.
a. By what percentage did the price of a newspaper rise?
Answer: 1,233.3%
Formula: ($2.00 / $0.15 – 1) x 100% = 1,233.3%
b. By what percentage did the wage rise?
Answer: 532.2%
Formula: ($20.42 / $3.23 – 1) x 100% = 532.2%
c. In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?
Answer: 2.79 minutes in 1970 and 5.88 minutes in 2009
Formula: ($0.15 / $3.23) x 60