Question

There are many different types of market baskets that economists measure. For example, the market basket for consumers—called the Consumer Price Index—tracks the prices associated with the typical consumer’s purchases of goods and services. The Producer Price Index tracks the prices that firms receive when selling their goods and services.

Indicate the appropriate market basket to use in each of the following instances.

Consumer Price Index:

a)	Measuring differences in the cost of living between different cities.
b)	Examining prices changes that might affect businesses.
c)	Measuring the cost of living for a typical consumer.

Producer Price Index:

A)	Measuring differences in the cost of living between different cities.
B)	Examining price changes that might affect businesses.
C)	Measuring the cost of living for a typical consumer.

Answer 1

Consumer Price Index

c) Measuring the cost of living for a typical consumer

The above mentioned market basket is used for the CPI. Inflation levels are determined by the economists, politiciams and analysts by using the market basket and CPI plays a vital role in the same. This enables to know teh patterns of expenditure and the type of goods used by the consumers for a given period of time. Through this market basket we can know the cost of living of the consumers for which the CPI is calculated, therefore, it helps in measuring the cost of living for a given consumer range.

Producer price Index

b) Examining price changes that might affect businesses

The weighted index of prices measured at the wholesale or producers level is the Producers price index. It measures the average change in selling prices received by domestic producers of goods and services over time. It tracks the prices that firms receive when selling their goods and services. Where the acitivities of selling of goods and services are involved there certainly the businesses are affected. Therefore, PPI falls into the market basket of examining price changes that might affect businesses.