Chapter 24 hw: Group C

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


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
   Cost in Year 2
   Cost in Year 3


2. Using Year 1 as the base year, compute the index:
   CPI in Year 1
   CPI in Year 2
   CPI in Year 3


3. Compute the inflation rate:
   Inflation rate for Year 2
   Inflation rate for Year 3


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?

A: 1. The CPI is defined as the measure of the overall cost of goods and services bought by the typical consumer. Its purpose is to determine changes in the cost of living for a typical consumer, and as the Mankiw book states, to gauge how much incomes must rise to maintain a constant standard of living.

1. Compute the cost of the basket:

Cost in Year 1: 3(10) + 4(12) = 78

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

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

2. Using year one as the base year, compute the index:

CPI in year 1: (78/78)*100 = 100

CPI in year 2: (96/78)*100 = 123

CPI in year 3: (114/78)*100 = 146

3. Compute the inflation rate:

Inflation rate for Year 2: (123-100) = (23/100)*100 = 23%

Inflation rate for Year 3: (146-123) = (23/100)*100 = 23%

4. I believe that one of the best measures of the standard of living of a country can be found by comparing the Human Development Index (HDI) between countries. According to the link, this index is a comprehensive measure of all the facets that make up a "good" standard of living, including life expectancy, literacy, well being, and child welfare. I thought that it was very interesting that a measure was included that factors in how a countries' economic policies affect the standard of living. This makes the HDI an invaluable measure for economists, that could use the index to lobby for the continued use of certain economic principles by a countries' government in order to maintain a certain HDI ranking.