Question

1. How CPI and cost of living are related?

2. Can we compare CPI and GDP Deflator to compare inflation?

3. How can we compare 1980 property rents to today’s property rents?

4. When the real and nominal interest rates are or become equal?

5. Why CPI is may not be a good measure of Cost of Living?

Answer 1

Answer 1. CPI or consumer price index is an indicator of the inflation level. Cost of living index is a conceptual measurement goal which measures changes over time in the amount that Consumers need to spend in order to live a satisfactory life. Both measures the price of goods and services necessary to sustain a satisfactory lifestyle.

Answer 2. No, CPI measures the change in price of goods and services bought by consumers but GDP deflator takes into account the change in price level of all final goods and services.

So CPI usually overstate the inflation.

Answer 3. We can compare 1980s property rates by todays property rates by factoring in the inflation over the years . For this we will have to take a base year. This will allows us to compare the two rates without being affected by the inflation rate.

Answer 4.

When Inflation rate is zero, nominal and real interest rate becomes equal. As real interest rate= Nominal interest rate- Inflation rate.

Answer 5. Cost of living index includes many other factors like public facilities such as electricity, healthcare etc. CPI doesn't take care of all these factors used to determine the cost of living.

Note-According