When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps. | Lecture Issues in economics today - Chapter 13 Chapter 13 Overstatement of the Cost of Living by the CPI McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Chapter Outline THE EVIDENCE THAT CPI IS OVERSTATED CONSEQUENCES OF NOT FIXING THE CPI McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. The CPI The CPI is an index of indexes. Each category of good and service generates an index. These indexes are then used to create a more encompassing index. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Flaws in the CPI Substitution There is no accounting for substitutions between goods when relative prices change. If the price of one type of apple increases and the price of another does not people may substitute one for the other. This overstates the impact on the cost of living from this price increase. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Flaws in the CPI Where People Buy People have changed the places they buy goods. People no longer exclusively shop in traditional grocery stores but buy much of their food at discount warehouse stores. People buy consumer electronics at large home appliance stores rather than relatively expensive department stores. When people change the venue in which they purchase goods and the Bureau of Labor Statistics BLS does not change where they survey this overstates the increase in the cost of living. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Flaws in the CPI When People Buy As more people work specifically as more women work people change when they buy goods. People no longer shop mostly on weekdays but use weekends and holidays to shop. When people change when they purchase goods and the BLS does not change the BLS will miss weekend and holiday sales and this overstates the increase in the cost of living. McGraw Hill Irwin 2002 The McGraw Hill Companies Inc. All Rights Reserved. Flaws in the CPI
