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Chapter 22: Q. 11 (page 553)

How do economists use a basket of goods and services to measure the price level?

Short Answer

Expert verified

By using various methods economists do this task.

Step by step solution

01

Step 1. Definition

Price levels are constituted by index number while the rate of inflation is the rate of growth of price level.

02

Step 2. Basket of goods and services.

Economists measure the price level by a method like first, they give the weights to the goods and services that people buy on actual quantities and then they compute their weighted average of individual baskets.

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Most popular questions from this chapter

The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer.

What is deflation?

Why does “substitution bias” arise if we calculate the inflation rate based on a fixed basket of goods?

Go to this website (http://www.measuringworth.com/ppowerus/) for the Purchasing Power Calculator at Measuring Worth.com. How much money would it take today to purchase what one dollar would have bought in the year of your birth?

Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the CPI to convert from nominal to real would be more appropriate than using the GDP deflator.
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