Measuring the Cost of Living
Chapter 24
Measuring the Cost of Living
Introduction
1931 – Year of Great Depression in the USA. But in spite of this fact some people contrived to earn $80 000, it was famous baseball player Babe Ruth. Even the President Herberd Hoover had a lesser salary of $75 000. When Ruth was asked if he thought it was right that his salary was higher than President’s he replied that he had a better year.
Year of 2007 describes a different picture. The average baseball player gets paid $4.8 million. We consider the fact that the cost of living, products and services has grown in recent decades. But it does not give us any explanation if Babe Ruth had a better standard of living than the average baseball player now, because prices for goods and services were significantly lower than nowadays.
The quantity of produced goods and services within the state shows the GDP. But how to measure the total cost of living? To answer this question we need to find out how to turn dollar into consumer price index (a relevant unit which measures the overall cost of goods and services purchased by a customer) to be able to compare cost of living over the time.
Inflation – situation when total cost of goods and services increases. In this way expenditures of the average family increase in order to maintain the same standard of living.
Inflation rate – changes in price level from the earlier terms in percentages.
The better way to measure the inflation rate is to use the CPI (consumer price index) with statistics. The former shows the cost of living over the time.
The Consumer Price Index (CPI)
The CPI and inflation rate are calculated by the Bureau of Labor Statistics by computing prices of hundreds of goods and services. For better understanding and explanation pretend that consumers buy only two products pizza and coke
How to calculate the CPI?
1. Fix the basket. Measuring the cost of living we should identify which product is more important to the consumer. If the
Measuring the Cost of Living
Introduction
1931 – Year of Great Depression in the USA. But in spite of this fact some people contrived to earn $80 000, it was famous baseball player Babe Ruth. Even the President Herberd Hoover had a lesser salary of $75 000. When Ruth was asked if he thought it was right that his salary was higher than President’s he replied that he had a better year.
Year of 2007 describes a different picture. The average baseball player gets paid $4.8 million. We consider the fact that the cost of living, products and services has grown in recent decades. But it does not give us any explanation if Babe Ruth had a better standard of living than the average baseball player now, because prices for goods and services were significantly lower than nowadays.
The quantity of produced goods and services within the state shows the GDP. But how to measure the total cost of living? To answer this question we need to find out how to turn dollar into consumer price index (a relevant unit which measures the overall cost of goods and services purchased by a customer) to be able to compare cost of living over the time.
Inflation – situation when total cost of goods and services increases. In this way expenditures of the average family increase in order to maintain the same standard of living.
Inflation rate – changes in price level from the earlier terms in percentages.
The better way to measure the inflation rate is to use the CPI (consumer price index) with statistics. The former shows the cost of living over the time.
The Consumer Price Index (CPI)
The CPI and inflation rate are calculated by the Bureau of Labor Statistics by computing prices of hundreds of goods and services. For better understanding and explanation pretend that consumers buy only two products pizza and coke
How to calculate the CPI?
1. Fix the basket. Measuring the cost of living we should identify which product is more important to the consumer. If the