Chapter 11

Chapter 11 is titled “measuring the cost of living” and introduces the consumer price index, which measures the overall cost of the goods and services bought by a typical consumer. It goes on to compare the CPI to the GDP deflator and how to correct economic variables for the effects of inflation, such as dollar figures from different times, indexation, real and nominal interest rates.

Where I live the cost of living is extremely high, however, I was born in this town and have lived here my whole life so it was never really my decision to live here or not. When my parents moved to this town the living costs were definitely not as much as they are now, but there were also other reasons why they moved here and why they have stayed.

It is hard to change the rate of inflation by changing what is purchased because all of the items in the economy have been influenced by inflation, although some may have changed more than others according to the substitution bias. It would be much more realistic to change the rate of inflation by purchasing at a different time rather than buying a different item. This is a serious overestimate problem of CPI because it sets a fixed cost to the basket of goods although the prices are changing and by different amounts. There are many times that I will time purchases around sales, especially times like cyber monday and seasonal sales, such as before Christmas and the new school year. A lot of times I will also change my purchases because of sales because something that would have been too expensive before could have come into my price range. When the prices are lower you can buy more items for the same amount as it would have been before.

The improvement of goods is serious in some markets and less serious in others. For example, the market of technology, particularly phones and computers is advancing so rapidly that it causes a problem in measurement, however this may not be as much of a problem for other goods, such as food that won’t change that much. If your raise is 2% and the rate of inflation is 2% you do break even, but you are in the same place economically as you were before the change and therefore are not better or worse off but have just shifted with the economy.