Ch 8 Cost of Living 2024 PDF - Macroeconomics

PowerPoint Presentations for Macroeconomics Third Canadian Edition by Karlan/Morduch/Alam/Wong Adapted for the Third Canadian Edition by Andrew Wong University of Alberta Chapter 8 The Cost of Living Extension from last chapter From Chapter...

PowerPoint Presentations for Macroeconomics Third Canadian Edition by Karlan/Morduch/Alam/Wong Adapted for the Third Canadian Edition by Andrew Wong University of Alberta Chapter 8 The Cost of Living Extension from last chapter From Chapter 7: “GDP tells us nothing about what you can buy with a given amount of money in that country.” The key to understanding the cost of living is to look at the full picture. If all prices and incomes rose at the same rate everywhere in the world, tracking the cost of living would be simple accounting. Measuring price changes over time Some price changes will matter more to a consumer than others. Most important factors: 1. How much price changes (and what direction) 2. Whether item is big part of total budget Economists need to track how individual prices move over time, giving the most weight to the items that account for the biggest shares of a typical consumer’s budget. This process can give a measure of how the overall cost of living has changed. The Consumer Price Index (CPI) Consumer price index (CPI) is the most commonly used index tool to track changes in cost of living via market basket of typical Canadian household. Every month, Statistics Canada computes and reports the CPI. It uses data on the prices of more than 600 different goods and services. Four steps to compute CPI and the inflation rate 1. Determine the market basket – list of specific goods and services, in fixed quantities correspond to a household’s spending (Survey of Family Expenditures FAMEX). Basket weights can be found here. 2. Find the prices and compute the cost of the market basket. Four steps to compute CPI and the inflation rate The Consumer Price Index Statistics Canada calculates a variety of CPI. For each province and territory and for 19 CMAs (cities) across Canada. For several narrow categories of goods and services (such as shelter, food, and gasoline). Headline (all items) inflation: changes in prices for the entire market basket of the average urban household. Core inflation: price changes of the underlying trend in inflation. Statistics Canada uses three measures: CPI-common, CPI-median, and CPI-trim.  The 12-month change in the CPI, Jul 2019 to Jul 2024 CPI rose 8.1% on a year-over-year basis in June 2022. CPI fell 0.4% on a year-over-year basis in May 2020. Source(s): Statistics Canada Table 18-10-0004-01 The Consumer Price Index Two videos are available on Statistics Canada’s YouTube channel. " An Overview of Canada's Consumer Price Index (CPI ) " and " The Consumer Price Index and Your Experience of Pr ice Change " Challenges in Measuring Price The CPI is not a perfect measure of the cost of Changes living. CPI tries to balance out consumption of different types of people in different life stages and situations. It is an average across very large group of consumers. Changes in prices, trends, innovation and substitution require updated in the goods and services measured. Updates undermine comparing a constant basket of goods and services. CPI and COVID-19 (Excluded from exams) Sudden shifts in spending patterns during the COVID-19 pandemic renders the official CPI less effective as an economic indicator. Canadians were spending differently as they adapted to staying home, travelling less and buying more of certain items and less of others. Statistics Canada (in partnership with the Bank of Canada) develops the adjusted price index that takes into account how these shifts in spending pattern when weighting the components in the CPI. Interested students can refer to the paper here. Using Price Indices One of the purposes of measuring the overall level of prices in the economy is to perform comparison between dollar figures from different points in time. Indexing – automatically increases payments in proportion to the cost of living (indexed to inflation). COLA (cost of living allowance) automatically increases the wage when CPI increases. Deflating Nominal Variables Deflating nominal variables Suppose a worker made $4.25/hour in 1993. How much is this worth today (2023) if the CPI in 1993 was 85.6 and today it is 148.9? $4.25 in 2023 prices = $4.25 × (148.9/85.6) = $7.39 8-15 Other Price Indices Producer Price Index (PPI) measures the prices of goods and services purchased by firms. It includes capital goods and raw materials that are usually not part of usual consumer basket. Following indices are used to adjust for differences in prices across locations: World Bank’s International Comparison Program (ICP) Index Main measure used for international price comparisons Other Price Indices Purchasing Power Parity (PPP) Simple theory states goods ought to cost the same everywhere after translating into common currency using foreign exchange rates. May not hold due to (1) transaction costs, (2) non- tradables, and (3) trade restrictions. PPP-adjustment (PPP-adjusted variables) – recalculate economic statistics to account for differences in price levels across countries. Calculating PPP-adjusted GDP Suppose Argentina has a GDP per capita of $10,972 USD and that the cost of living is 30.2% lower than Canada. What is the PPP-adjusted GDP for Argentina? PPP-adjusted GDP per capita =$10,972 * [1/(1-0.302) ] = $15,719 End of Chapter