ECON 2301 Unit 2
Up Work Samples

 

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Unit 2: Macroeconomic Measurement and Basic Concepts

 

 

A.  Read the following selections from the Margin Notes by clicking on each link.

 

B.  Watch these presentations. When you click on one of the links below, a new screen will pop up. Use the scrollbar on the side of the new screen to navigate. You need Adobe Reader to view PDF files.

 

C.  (Optional) Read the following chapters from the textbook.

Chapters 05 - 07

 

D.  The following Optional Links will help you do better in your course but they are not required.

LOOK AT THIS!

For every assignment, I've given you a grading rubric.

If you look at the rubrics you will know exactly what I look for when I grade an assignment.

The link to each assignment's grading rubric will always be under Optional Links on the same unit page as the assignment instructions.

ECON 2301 Activity #1 Rubric

Macroeconomics Review

The Phillips Curve and Expectations Theory (PDF)

Test Yourself: Business Cycles and Unemployment (PDF)

Test Yourself: GDP (PDF)

Test Yourself: Inflation (PDF)

 

 

E.  Activity #1: What Does A Dollar Really Buy? (10 points)To Do Note

You hear the phrases on the news: "The CPI is up," "inflation is down." Though your first impulse may be to change the channel, the CPI is at least as relevant to most consumers' lives as the latest sports scores.

What exactly does a dollar buy? The CPI is what most people think of as the "inflation rate." It is used by businesses, individuals and government to make important decisions. What does it mean to you? Let's use the CPI to see just how much inflation affects our lives.

In this activity you will describe the purpose of a price index, explain how a price index is calculated, describe the weaknesses of the CPI, interpret CPI data as a measure of economic health and identify who is harmed and who is helped by inflation.

We use the CPI, or Consumer Price Index, to measure price changes in the economy. It is a measure of the average change in prices paid by urban customers for a "market basket" of goods and services. These goods and services include food, clothing, shelter, newspapers and CDs. Items on which the average consumer spends a great deal of money, such as food, are given more weight, or importance, in computing the index than items such as toothpaste and movie tickets, on which the average consumer spends comparatively less. As with any weighted index, the CPI probably won't match your own budget exactly. The increase in the CPI is what most people think of as the "inflation rate." It is used by retailers in predicting future price increases, by employers in calculating salaries and by the government in determining cost-of-living increases for Social Security.

[A WARNING OF SORTS: This 1st assignment involves some math and may look a little overwhelming when you begin. No matter what your specific situation, though, you will do fine if you will take your time and follow the instructions in the assignment. What you cannot do is to wait until the last minute and try to rush through the assignment. If you do, I suspect you will end up confused, frustrated and positive that the material is beyond you. It's not … but it does require your attention (focus on what you are doing) and your determination (keep trying until you get it). The material in this assignment will initially be foreign to most of you since you are unfamiliar with economic concepts. Once you've completed it, you'll realize that it deals with fairly low-level math and basic economic ideas. The good news is that it involves issues we're all interested in given this economy.]

 

Key Economic Concepts you need to know:

  • Price index: a number used to measure the price level. The value of the index is set at 100 in the base year or period.

  • Consumer Price Index (CPI): the price index most commonly used to measure the impact of changes in prices on households. The index is based on a standard market basket of goods and services purchased by a typical urban family.

  • Inflation: the rate of upward movement in the price level for goods and services. By inflation economists mean a sustained rate of increase in the price level over time. Over the long haul, the fundamental cause of inflation is the growth rate of the money supply.

 

A.  Visit the Consumer Price Indexes website to learn more about the CPI. As you browse the CPI information, look for answers to the following questions.

1.      How is the CPI market basket determined?

2.      What goods and services does the CPI cover?

3.      How are CPI prices collected and reviewed?

4.      How do you read or interpret an index?

5.      Do the published averages match an individual's inflation experience?

6.      How is the CPI used?

7.      What are some limitations of the index?

8.      Will the CPI be revised or updated in the future?

B.  There is more than one way to construct a price index. The easiest to understand is probably the weighted average method. This method compares the total cost of a fixed market basket of goods in different years. To construct our price index, we will follow the steps below.

1.  To construct any price index, some previous period is selected as the base year. The base year always has an index number of 100. We will use the total cost of our small market basket in 1995 to compare with successive years. The following table represents the total cost of our market basket in the base year of 1995.

Market Basket
Food and Beverages

Base Year

Price

Quantity per Year

Price X Quantity = Yearly Cost

Bread, whole wheat, per lb.

1995

$1.13

70

$79.10

Apples, Red Delicious, per lb.

1995

$0.77

40

$30.08

Gallon of Milk, fresh, whole, fortified

1995

$2.47

104

$256.88

Peanut butter, creamy, all sizes, per lb.

1995

$1.80

26

$46.80

Potato chips, per 16 oz.

1995

$3.08

60

$184.80

Celery, per lb.

1995

$0.74

40

$29.60

1995 Total Dollar Cost of Goods:

$627.26

1995 Index Number:

100

 

2.  Find the total dollar cost of the market basket in the current year using the same approach and the BLS Average Retail Food and Energy Prices (Look at US city average, Prices and the latest date.). Create a table like the one below and enter the year and price for each item. Note: Quantities will remain constant, only prices will change for this year.

Market Basket
Food and Beverages

Current Year

Price

Quantity per Year

Price X Quantity = Yearly Cost

Bread, whole wheat, per lb.

 

 

70

 

Apples, Red Delicious, per lb.

 

 

40

 

Gallon of Milk, fresh, whole, fortified

 

 

104

 

Peanut butter, creamy, all sizes, per lb.

 

 

26

 

Potato chips, per 16 oz.

 

 

60

 

Celery, per lb.

 

 

40

 

____ Total Dollar Cost of Goods:

 

____ Index Number:

 

 

3.  The cost of the basic market basket in the current year is then expressed as an index number of the cost of the basic market basket in the base year (1995), using the following formula.

Index number =

(Current year cost of market basket    Base year cost of market basket)  X  100

You now have the index number of the current year.

 

4.  Subtract the base year index of 100 from the current year index number you calculated to measure the percentage change in prices from the base year (110 – 100 = 10% or 95 – 100 = -5%). For example, a current year index number of 110 means a 10% increase in price level from the base year. This is the CPI, the rate of inflation.

[This activity is based on work from – but no longer maintained by – EconEdLink.]

 

C.  If you’d like to explore further, visit any of the following sites.

CSG Network's Consumer Price Index Calculator

Calculator Pro's Consumer Price Index Calculator

Dinkytown's Consumer Prices Calculator (requires java)

Zenteri's CPI Calculator

D.  Feel free to do all or parts of the assignment as many times as you need in order to feel comfortable with the material. If you have problems, don't try to do it all at once. Complete a little here and there as you have time. Once you have completed the work above to your satisfaction, send me your answers to the following questions. Your answers should be thorough, specific, include relevant concepts from the course material and be free of spelling and grammar errors.

NOTE: You should normally never send your work as a list … lists encourage brevity rather than depth and don't strengthen your writing skills. For this assignment, though, I want you to answer the questions below in numbered order. Your answers should, however, be thorough, in complete sentences and use correct spelling and grammar. Do not include the questions when you send your work to me. I know what they are. Send me only your numbered answers.

  1. How is the CPI market basket determined?

  2. What goods and services does the CPI cover?

  3. How are CPI prices collected and reviewed?

  4. How do you read or interpret an index?

  5. Do the published averages match an individual's inflation experience?

  6. How is the CPI used?

  7. What are some limitations of the index?

  8. Will the CPI be revised or updated in the future?

  9. What is the total dollar cost of the market basket above for the current year (expressed as a dollar amount)?

  10. What is the total cost of the market basket above for the current year (expressed as an index number of the cost of the basic market basket in the base year (for example 110))?

  11. What is the percentage change in prices from the base year, the rate of inflation from 1995 to the current year (expressed as a percent)?

  12. Make specific and detailed connections to course content. Always include course concepts in your work. If you're reading your margin notes and watching the presentations, you'll have plenty of material from which to choose on every activity. This question is one you will see in every assignment for this course since I expect you to show me that you are learning the assigned material in the margin notes and presentations. For this assignment you don't need to answer this question as a separate question IF you do a thorough job on the first 11 since those answers will make the connections. If not, you need to show your mastery of the material as a separate item 12.

 

Activity Submission Instructions

By the deadline shown in the Course Schedule on the main page of your syllabus:
  • Send your numbered answers to the 12 items requested in the body of a new email to dramyglenn@earthlink.net.
  • Put only your name and Activity #1 at the beginning of your email. (If you read your syllabus, you know that I tend to delete assignments without a name.)

  • Be careful to use the correct subject line. If you are not positive you know the correct subject line, go back and read your syllabus carefully. Emails with incorrect subject lines will not reach me. At best, you'll correct your mistake later and your assignment will be late. At worst, your assignment will never reach me and you'll receive no points for it.
  • Late answers lose one point per day late, including weekends and holidays.

 


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Copyright 1996 Amy S Glenn    
Last updated:   03/01/2017   0130

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