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lows: C P I i n Y e a r 2 C P I i n Y e a r 1I n f l a t i o n R a t e i n Y e a r 2 = 1 0 0C P I i n Y e a r 1? ?169。 2022 Thomson SouthWestern FYI: What Is in the CPI’s Basket? 17% Transportation 15% Food and beverages Medical care 6% Recreation 6% Apparel 4% Other goods and services 4% 42% Housing 6% Education and munication 169。 2022 Thomson SouthWestern 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. 169。 2022 Thomson SouthWestern The GDP Deflator versus the Consumer Price Index ? Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge how quickly prices are rising. ? There are two important differences between the indexes that can cause them to diverge. 169。 2022 Thomson SouthWestern CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION ? Price indexes are used to correct for the effects of inflation when paring dollar figures from different times. 169。 2022 Thomson SouthWestern Table 2 The Most Popular Movies of All Times, Inflation Adjusted 169。 2022 Thomson SouthWestern Figure 3 Real and Nominal Interest Rates 1965 Interest Rates (percent per year) 15% Real interest rate 10 5 0 5 1970 1975 1980 1985 1990 1995 2022 2022 Nominal interest rate Summary 169。 2022 Thomson SouthWestern ? Dollar figures from different points in time do not represent a valid parison of purchasing power. ? Various laws and private contracts use price indexes to correct for the effects of inflation. ? The real interest rate equals the nominal interest rate minus the rate of inflation.