SS 113 (Economic Planning and Strategy) report on measuring the cost of livingg. Additional References: N. Gregory Mankiw's Principles of Macroeconomics. N. Gregory Mankiw's PPT slides for Principles of Macroeconomics.

1. Arvin John Valiente E.
Maruya
BSED – SS4

2. For Today
Consumer Price Index
Inflation
Review of definition
Review of real and nominal variables
A look at the History of Inflation
The Costs of Inflation
The Inflation Myth

3. Objectives:
Define consumer price index (CPI) and inflation;
Discuss the relationship between CPI and
inflation;
Review the difference between real and nominal
values;
Identify the limitations of CPI;
Discuss national issues pertaining to inflation and
CPI.

4. Prelection

5. Index Numbers
Value of measure in a current period
_________________________________ X 100
Value of measure in base period

6. Index of Love
2009 – I AM SO INLOVE (99%)
2010 - SWERTE KO SA AKONG UYAB (95%)
2011 – AY DI MI KAUBAN. SIGE LANG (85%)
2012 – MY LOVE IS LIKE A TREE. TAAS! (98%)
2013 – KFINE. DI MUREPLY, DI PUD MAGPAKITA.
(60%)
January 2014 – Katotohanan, Kalayaan, Katarungan!
(43%)
Question: What is my index of love?

7. THE CONSUMER PRICE INDEX
An index of cost, through
time, of a fixed market
basket of goods purchased by
a typical household in some
base period.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

8. THE CONSUMER PRICE INDEX
The consumer price index (CPI) is a
measure of the overall cost of the goods and
services bought by a typical consumer.
The National Statistics Office reports the
CPI each month.
It is used to monitor changes in the cost of
living over time.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

9. THE CONSUMER PRICE INDEX
When the CPI rises, the
typical family has to spend
more pesos to maintain the
same standard of living.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

10. 16%
Food and
beverages
17%
Transportation
Medical care
6%
Recreation
6%
Apparel
4%
Other goods
and services
4%
41%
Housing
6%
Education and
communication
Copyright©2004 South-Western

11. How the Consumer Price Index Is
Calculated
Fix the Basket: Determine what prices are
most important to the typical consumer.
The National Statistics Office (NSO)
identifies a market basket of goods and
services the typical consumer buys.
The NSO conducts monthly consumer
surveys to set the weights for the prices of
those goods and services.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

12. How the Consumer Price Index Is
Calculated
Find the Prices: Find the
prices of each of the goods
and services in the basket for
each point in time.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

13. How the Consumer Price Index Is
Calculated
Compute the Basket’s Cost:
Use the data on prices to
calculate the cost of the basket
of goods and services at
different times.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

14. How the Consumer Price Index Is
Calculated
Choose a Base Year and Compute theChoose a Base Year and Compute the
Index:Index:
Designate one year as the base year,
making it the benchmark against which
other years are compared.
Compute the index by dividing the price
of the basket in one year by the price in
the base year and multiplying by 100.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

15. How the Consumer Price Index Is
Calculated
Compute the inflation rate:
The inflation rate is the
percentage change in the price
index from the preceding
period.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

16. How the Consumer Price Index Is
Calculated
Purchasing Power
of the Peso (PPP) =
reciprocal of CPI *
100 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

17. Activity # 1 – Measuring CPI

19. Problems in Measuring the Cost of
Living
The CPI is an accurate
measure of the selected
goods that make up the
typical bundle, but it is not a
perfect measure of the cost
of living.

20. Problems in Measuring the Cost of
Living
Substitution bias
Introduction of new goods
Unmeasured quality
changes

21. Problems in Measuring the Cost of
Living
Substitution Bias
The basket does not change to reflect
consumer reaction to changes in relative
prices.
Consumers substitute toward goods that have
become relatively less expensive.
The index overstates the increase in cost of
living by not considering consumer
substitution.

22. Problems in Measuring the Cost of
Living
Introduction of New Goods
The basket does not reflect the change in
purchasing power brought on by the
introduction of new products.
New products result in greater variety, which
in turn makes each dollar more valuable.
Consumers need fewer dollars to maintain
any given standard of living.

23. Problems in Measuring the Cost of
Living
Unmeasured Quality Changes
If the quality of a good rises from one year to
the next, the value of a dollar rises, even if the
price of the good stays the same.
If the quality of a good falls from one year to
the next, the value of a dollar falls, even if the
price of the good stays the same.
The BLS tries to adjust the price for constant
quality, but such differences are hard to
measure.

24. Problems in Measuring the Cost of
Living
The substitution bias, introduction of new goods,
and unmeasured quality changes cause the CPI to
overstate the true cost of living.
The issue is important because many
government programs use the CPI to adjust for
changes in the overall level of prices.
The CPI overstates inflation by about 1
percentage point per year.
 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.

25. How is the CPI used?
1. As a Policy Target
2.To Index Payments
3. To Translate from Nominal
to Real Variables

26. Nominal to Real Values
LOVE

27. Problem Sets

28. Nominal to Real Variables
Problem Set # 1:
Vilma receives a salary of 2,500Php
monthly. It is her habit that she visits Tidoy to
buy Tocino and Soriso at 500Php. The following
month, Vilma was promoted and she received
double her last salary. When she came to visit
Tidoy, she found out that the price of Tocino
and Soriso wento up from 500Php to 1000Php.
Find the real wage.

29. Nominal to Real Variables
Problem Set # 1:
Vilma receives a salary of 2,500Php
monthly. It is her habit that she visits Tidoy to
buy Tocino and Soriso at 500Php. The following
year, Vilma was promoted and she received
double her last salary. When she came to visit
Tidoy, she found out that the price of Tocino
and Soriso wento up from 500Php to 1000Php.
Find the real wage.

30. Nominal to Real Variables
Problem Set # 2:
Vilma receives a salary of 2,500Php
monthly. It is her habit that she visits Tidoy
to buy Tocino and Soriso at 500Php. The
following year, when she came to visit Tidoy,
she found out that the price of Tocino and
Soriso wento up from 500Php to 1000Php.
Find the real wage.

31. Nominal to Real Variables
Problem Set # 3:
Joy received 500Php from his ninang
Grace on his 18th
birthday. He bought 100Php
worth of Bulad to satisfy his cravings. On his
19th birthday, Joy received 1000Php.
President Noynoy has signed a bill imposing
that Bulad will be priced 100Php forever. Find
the real wage.

32. The Importance of Real Values
Real values = ( nominal value/ price index ) X 100

33. PART 2 - Inflation

34. Inflation and the Measurement of
Real GDP
“The GDP price index measures
the prices of all goods and services
that are included in the GDP,
while the CPI measures the prices
of all goods and services bought by
households.”

35. THE CLASSICAL THEORY OF INFLATION
Inflation is an increase in the overall
level of prices.
Hyperinflation is an extraordinarily
high rate of inflation.

36. THE CLASSICAL THEORY OF INFLATION
Inflation: Historical Aspects
Over the past 60 years, prices have risen on
average about 5 percent per year.
Deflation, meaning decreasing average prices,
occurred in the U.S. in the nineteenth century.
Hyperinflation refers to high rates of inflation
such as Germany experienced in the 1920s.

37. THE CLASSICAL THEORY OF INFLATION
Inflation: Historical Aspects
In the 1970s prices rose by 7
percent per year.
During the 1990s, prices rose at
an average rate of 2 percent per
year.

38. THE CLASSICAL THEORY OF INFLATION
The quantity theory of money is used to
explain the long-run determinants of the
price level and the inflation rate.
Inflation is an economy-wide phenomenon
that concerns the value of the economy’s
medium of exchange.
When the overall price level rises, the
value of money falls.

39. Copyright © 2004 South-Western
Quantity of
Money
Value of
Money,1/P
Price
Level, P
Quantity fixed
by the Fed
Money supply
0
1
(Low)
(High)
(High)
(Low)
1
/2
1
/4
3
/4
1
1.33
2
4
Equilibrium
value of
money
Equilibrium
price level
Money
demand
A

40. Copyright © 2004 South-Western
Quantity of
Money
Value of
Money,1/P
Price
Level, P
Money
demand
0
1
(Low)
(High)
(High)
(Low)
1
/2
1
/4
3
/4
1
1.33
2
4
M1
MS1
M2
MS2
2. . . . decreases
the value of
money . . .
3. . . . and
increases
the price
level.
1. An increase
in the money
supply . . .
A
B

41. “Inflation benefits no one!”

42. The Costs of Inflation
Inflation can redistribute
purchasing power from one group
to another, but it cannot-by itself-
decrease the average real income
in the economy.
Oil vs. US

43. The Costs of Inflation
When people must
spend time and other
resources coping with
inflation, they pay an
opportunity cost.

44. Philippines Top Grossing Movies as of
March 2014
http://www.starmometer.com/2014/03/01/top-20-highest-grossing-filipino-movies-of-all-time-as-of-march-
2014/

45. Rank Film Studio(s) Year Domestic gross
1 Girl, Boy, Bakla, Tomboy Star Cinema, Viva Films 2013 ₱ 429,147,428
2 My Little Bossings Octo Arts Films 2013 ₱ 393,000,000 (est.)
3 Sisterakas Star Cinema, Viva Films 2012 ₱ 391,400,000 (est.)
4 It Takes a Man and a Woman Star Cinema, Viva Films 2013 ₱ 375,024,507
5
The Unkabogable Praybeyt
Benjamin
Star Cinema, Viva Films 2011 ₱ 331,631,283
6 Bride for Rent Star Cinema 2014 ₱ 326,958,423
7 Starting Over Again Star Cinema 2014 ₱ 307,239,951
8 No Other Woman Star Cinema, Viva Films 2011 ₱ 278,418,883
9 The Mistress Star Cinema 2012 ₱ 262,790,230
10 This Guy’s in Love with U Mare! Star Cinema, Viva Films 2012 ₱ 250,540,701

46. Indexation
The automatic
correction by law or
contract of an amount for
the effects of inflation.

47. Indexation
Starting June 1, 2014, the new minimum wage in Region XI will be
P312.00 per day for workers in non-agriculture and in retail/service
enterprises employing more than 10 workers. In agriculture, the new
minimum wage will be P302.00 per day and in retail/service
establishments employing not more than 10 workers, P281.00 per day.
Wage Order No. RB XI- 18, issued May 7, 2014 provides for an
P11.00 per day basic pay increase and a P15.00 COLA integration.
Further, minimum wage earners will receive an additional P5.00
COLA per day effective December 1, 2014. The Wage Order does not
allow exemption from the payment of minimum wages
(http://www.nwpc.dole.gov.ph/news.html).

48. Real and Nominal Interest Rates
Suppose Gina deposits 45,000Php in a
bank account that pays an annual
interest rate of 10 percent. A year later,
after Gina has accumulated 100Php in
interest, she withdraws her 45,100Php.
Is Gina 100Php richer than she was
when she made the deposit a year
earlier?

49. Real and Nominal Interest Rates
INFLATION
ZERO INFLATION
DEFLATION

50. Conclusion
“Ang piso’y ‘di na
katumbas ng isang
daan.”

51. Additional References
Principles of Macroeconomics by N. Gregory Mankiw
Powerpoint Slides for Principles of Economics by N.
Gregory Mankiw.