Ch. 24 Homework for Group C

CHAPTER 24 | MEASURING THE COST OF LIVING

1.        What is the CPI and what is its purpose?

Consumer Price Index (CPI) is a measure of the overall cost of the goods and services bought by a typical customer.  The purpose of measuring the CPI is to monitor changes in the cost of living over time and compare and evaluate its relationship to the inflation rate.

2.       Fix the basket at 3 footballs and 4 basketballs.

Year	Price of Footballs	Price of Basketballs
Year 1	$10	$12
Year 2	$12	$15
Year 3	$14	$18

1.        Compute the cost of the basket:
Cost in Year 1 = ($10 x 3) + ($12 x 4) = $78

Cost in Year 2 = ($12 x 3) + ($15 x 4) = $96

Cost in Year 3 = ($14 x 3) + ($18 x 4) = $114

2.       Using Year 1 as the base year, compute the index:
CPI in Year 1 = ($78 / $78) x 100 = 100
CPI in Year 2 = ($96 / $78) x 100 = 123.08
CPI in Year 3 = ($114 / $78) x 100 = 146.15

3.       Compute the inflation rate:
NOTE: This computation is modeled from page 531, table 1, step 5

Inflation rate for Year 2 = (123.08 – 100) / 100 x 100% = 23.08%
Inflation rate for Year 3 = (146.15 – 123.08) / 123.08 x 100% = 18.74%

NOTE: This computation is modeled from page 532

Inflation rate for Year 2 = (123.08 – 100) / 100 x 100% = 23.08%
Inflation rate for Year 3 = (146.15 – 100) / 100 x 100% = 46.15%

4.      Take a look at the following link. Notice all the different measures of a country's "Standard of Living." Which do you think is the best measure and why?

Seeing that the U.S. is ranked 4^th on the Human Development Index (HDI), this lead me to believe that the best measure is the HDI because it is a comprehensive and comparative measure of life expectancy, literacy, education, and standards of living for countries worldwide.

HDI seems to be the one measure that considers the overall human development down to states, cities, villages, etc. by local organization or companies.

HDI is also about creating an environment in which people can develop their full potential and lead productive, creative lives in accordance with their needs and interests, thus bringing the focus back onto people and not just in incomes.