Question

What is the cost of living?

a. Yet another concept invented by economists to bore people out

b. A measurement of the amount of money needed to afford basic items

c. A measure of the cost of buying a car in different cities

d. A measure used to see the difference between real and nominal GDP

e. A measure used to see the difference between GDP and GNP

Which of the following would be something that would be included in the CPI but not the GDP deflator?

a. A computer game produced in San Jose and bought by consumers in Texas

b. A golf ball produced in Cleveland and bought by consumers in California

c. A box of Legos produced in Denmark is bought by consumers in New York

d. A large amount of military uniforms are made in South Carolina and bought by the US military

e. None of the above

Consider two people: Nanor and Kiara. Suppose Nanor earned $123,000 in 1995, and Kiara earned $200,000 in 2018. The CPI in 1995 was 152.4. The CPI in 2018 is estimated at 250.5. Who earns more in terms of purchasing power?

a. Nanor

b. Kiara

c. They both earn the same in terms of purchasing power

d. Unclear

e. None of the above

Answer 1

(1) A cost of living is the amount of money required to afford basic items, like food, house, healthcare, education

Answer: Option (B).

(2) . GDP deflator reflects the price of goods and services produced domestically. It does not included the change in the price of imported goods.

CPI reflects the price of goods and service bought by consumer. It also inclueds the change in the price of imported goods bought by consumer.

Hence, A box of Legos produced in Denmark (Europe) is bought by consumer in New York (United States) would be included in the CPI but not the GDP deflator.

Answer: Option (C)

(3) Nanor earned in 1995 = $123000

CPI in 1995 = 152.4

Nanor Purchasing power = ($123000 / 152.4)

Nanor Purchasing power = $807.08

Kiara earned in 2018 = $200000

CPI in 2018 = 250.5

Kiara purchasing power = ($200000 / 250.5)

Kiara Purchasing power = $798.40.

Nanor earns more in terms of purchasing power.

Answer: Option (A)