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Economics A100 Lecture Notes - Lecture 16: Starbucks, Producer Price Index, Capital Good

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School
Orange Coast College
Department
Economics
Course
Economics A100
Professor
Tierney

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Document Summary

Measures the cost of a basket of goods and services bought by firms rather than consumers (often thought to be useful in predicting changes in the consumer price index) Substitution bias: some prices rise more than others; consumers respond by buying less of the goods whose prices are rising and more of the goods whose prices are rising less or perhaps even falling. If a price index is computed assuming a fixed basket of goods, it ignores the possibility of consumer substitution and therefore overstates the increase in the cost of living from one year to the next. Introduction of new goods: when a new good is introduced, consumers have more variety from which to choose, and this in turn reduces the cost of maintaining the same level of economic well-being. Like the cpi, the gdp deflator measures the overall level of prices in the economy. The 2 price indexes usually move together, but there are important differences.

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Related Questions

The substitution bias in the consumer price index refers to the:

a. substitution by consumers toward new goods and away from old goods.

b. substitution by consumers toward a smaller number of high-quality goods and away from a larger number of low-quality goods.

c. substitution by consumers toward goods that have become relatively less expensive and away from goods that have become relatively more expensive.

d. substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.

1. The peak of the business cycle

a. usually occurs when the natural rate of unemployment is equal to its actual rate.

b. is the point where an expansion ends and a recession begins

c. is the minimum level of nominal GDP.

2. The consumer price index (CPI) reflects

a. the median annual expenditures of a typical single family of four on consumer goods

b. the average price of all goods and services computed from the ratio of nominal GDP to real GDP.

c. the changes in the prices of goods and services typically purchased by consumers.

3. The Consumer Price Index is NOT used

a. to measure the average price level of all final goods and services produced

b. to compute the U.S. inflation rate.

c. to measure changes in the cost of living

4. Which of the following is true of a price index that uses a fixed market basket?

a. It excludes new goods and services

b. It accurately predicts the impact of rising prices when purchases are made at superstores.

c. It overstates the importance of items that fall in price.

5. A quality-change bias in the construction of the CPI arises because

a. big box stores that carry electronic goods routinely run sales to reduce their inventories before stocking new models.

b. consumers also shop at superstores or outlet stores

c. newer versions of a product might be more expensive but could also be better than the older version.

1. For the economy as a whole Income must be more than expenditures.

Select one:

a. False

b. True

 

2. When measuring the Consumer Price Index (CPI), the major problems faced are:

Select one:

a. Substitution bias

b. Introduction of new goods

c. Unmeasured quality change.

d. All the above

 

3. Household spending on education is included in the consumption of services.

Select one:

a. True

b. False

 

4. Which of the following items is not part of the GDP calculation?

Select one:

a. The government expands the highway between two main cities.  

b. A person purchases a local car

c. A number of unemployed citizens receive unemployment insurance benefits.  

d. Local citizens receiving medical care