Exam 6: Measuring the Cost of Living

In 2000, Professor Knowitall made $40,000, in 2010 he earned $90,000, and in 2020 he earned $140,000. If the CPI was 40 in 2000, 60 in 2010, and 100 in 2020, then in real terms, when was Professor Knowitall's salary highest and lowest?

-Refer to Table 6-1. What was the inflation rate in 2019?

Suppose the average price of gas in 2018 was $1.25 per litre and $1.30 in 2019. The inflation rate was 3 percent in 2019. What was the 2019 price of gas in 2018 dollars?

Suppose that the CPI today is 120 and that it was 80 five years ago. Then, in today's prices something that cost $1 five years ago now costs $1.50.

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed, and it is cheaper to operate than gasoline engines. Which problem in the construction of the CPI would this situation represent, respectively?

Which of the following is the consumer price index used for?

Suppose that the nominal interest rate was 3 percent and the inflation rate was 1 percent. What happened with the value of savings?

The formula to calculate CPI between a base year (say, Year 0) and another, specified year, say Year 1, is CPI = (Expenditure on basket in Year 1)/(Expenditure on basket in Year 0)×100. Suppose an economy produces only two goods, food (f) and clothing (c). Let quantities and prices in Year 0 be qf0, qc0, pf0 and pc0, respectively, and let us adopt similar notations for Year 1, with the caveat that, for CPI, the quantities remain the same as in Year 0. a) Calculate, using the notations in the problem, the expenditure on the basket in Year 0, the expenditure on the basket in Year 1, and the CPI. b) Find the formulas for the share of each of the two goods in the expenditure on the basket in Year 0. Let sf and sc be the two shares. Show that the sum of the two shares is equal to 1. Let us multiply each of these shares by 100 and call them weights, wf and wc. Check that their sum is equal to 100. c) Using the notations wf and wc for the two weights, re-write the CPI formula. d) Replace wf and wc in the formula that you just wrote, and compare the result to the formula of definition for CPI. Are they identical? If not, what changes do you need to make in order to make them identical? e) Did you need to know quantities in Year 1 in order to compute CPI?

Most, but not all, athletic apparel sold in Canada is imported from other nations. If the price of athletic apparel increases, what will happen to the GDP deflator?

What kind of payment does interest represent?

Imagine a small town with only two unrelated inhabitants, David and Dixie, both living complex and fulfilling lives. Let us simplify their lives, to better understand the implications of using the CPI as a measure of the cost of living. Suppose David and Dixie consume only potatoes and fish: David consumes 4 potatoes and 6 fish a day, while Dixie consumes 6 potatoes and 4 fish a day. (David has a few more cats to feed, but Dixie likes to feed a couple of birds that nest in a nearby tree.) Initially, prices are $1 a potato and $2 a fish. a) Calculate David and Dixie's costs of living and their total expenditure. b) Now, suppose the price of potatoes increases to $2. Calculate the new costs of living and total expenditure. Calculate the CPI inflation rate. What would be the increase in David and Dixie's costs of living, in dollars, according to the inflation rate you have just calculated? What are the actual increases in their costs of living? What have we learned from this exercise? c) To deal with the harsher economic conditions, Dixie takes in a stray cat to scare away the birds from the tree. Now she consumes 4 potatoes and 5 fish. Recalculate Dixie's actual increase in the cost of living and discuss your result.

Suppose the prices of imported laptops increase dramatically, causing a 1 percent increase in the CPI. By how much will the GDP deflator most likely increase?

What are the categories of Canadian consumer spending, ranked from largest to smallest?

Jay wants to save an amount of money to buy a new canoe two years from now. He estimates that the price of the canoe will be $2000, and he wants to save the money in two tranches at the beginning of each of the next two years. For simplicity, suppose interest is computed only at the end of the year and Jay wants to save equal amounts every year. If the interest rate is 10% per year, how much does Jay need to save every year?

-Refer to Table 6-3. What was the inflation rate, as measured by the CPI, between 2017 and 2018?

Which statement best describes the correlation between nominal and real interest rates?

What do economists believe about the bias in the CPI as a measure of the cost of living?

In 1954, Canadian Prime Minister Louis Stephen St. Laurent was paid a salary of $15,000. Justin Trudeau, the Prime Minister in 2018, was paid $175,600. The price index for 1954 is 14.1 and the price index for 2018 is 133.4. What is, approximately, Prime Minister St. Laurent's salary equivalent in 2018 dollars?

You know that a chocolate bar costs 60 cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

Which problem in the construction of the CPI is the creation of the mobile phone most relevant to?