OKAY. WHAT WE WANT TO DO TODAY IS WE WANT TO TURN OUR ATTENTION TO ANOTHER TOPIC. WHAT WE'VE BEEN TALKING ABOUT REALLY

Transcription

1 ECO LECTURE TWELVE 1 OKAY. WHAT WE WANT TO DO TODAY IS WE WANT TO TURN OUR ATTENTION TO ANOTHER TOPIC. WHAT WE'VE BEEN TALKING ABOUT REALLY IS MICROECONOMICS, THE SUPPLY AND DEMAND AND THE WAY MARKETS OPERATE, AND SO FORTH. WHAT WE WANT TO DO TODAY IS TALK ABOUT MACROECONOMICS WHICH IS REALLY THE BRANCH OF ECONOMICS THAT EXAMINES THE OVERALL ECONOMY. YOU KNOW, MOST OF US ARE -- LIVE IN A MICROECONOMIC WORLD. AND BY THAT, I MEAN OUR DECISIONS ARE MADE IN A MICROECONOMIC SENSE. YOU GO TO THE STORE AND DECIDE TO BUY SOMETHING. YOU GET A JOB, DECIDE TO WORK SOMEWHERE. THOSE ARE MICROECONOMIC DECISIONS. YOU START A BUSINESS. THAT'S A MICROECONOMIC DECISION. MOST OF US LIVE IN THE MICROECONOMY, ME INCLUDED. BUT AT THE SAME TIME, THERE'S SOMETHING TAKING PLACE OUT THERE THAT WE DON'T REALLY PERCEIVE, BUT IT AFFECTS US IN A BIG WAY. AND IT'S REALLY SORT OF LIKE THE CLIMATE WHICH IS -- YOU CAN THINK OF IT AS THE MACROECONOMIC CLIMATE. HOW ARE THINGS GOING, YOU KNOW, IN THE OVERALL ECONOMY. AND THERE ARE THESE MAJOR CYCLES OR MAJOR TRENDS AT WORK THAT REALLY AFFECT ALL OF US. AND, YOU KNOW, IT'S NOT ALWAYS EASY TO PERCEIVE HOW WE'RE AFFECTED BY THOSE TRENDS, BUT NEVERTHELESS WE ALL ARE. SOMETHING MAY HAPPEN LIKE MY PAY MAY NOT GO UP AND I SAY, "OH, WHY DIDN'T MY PAY GO UP?" AND THE ANSWER IS, BECAUSE THE STATE OF

2 ECO LECTURE TWELVE 2 MISSOURI DIDN'T COLLECT MUCH IN TAX REVENUE. AND THE STATE OF MISSOURI DIDN'T COLLECT THE TAX REVENUE TO GIVE ME THE PAY RAISE BECAUSE MAYBE THERE'S A RECESSION IN THE ECONOMY. AND WHEN PEOPLE ARE OUT OF WORK, THEY DON'T PAY AS MUCH IN TAXES. AND SO WHAT I'M SAYING IS THAT MACROECONOMIC CLIMATE, IT CAN AFFECT ALL OF US. YOU MIGHT START UP A BUSINESS AND IT'S -- YOU'VE GOT A TERRIFIC IDEA FOR A BUSINESS AND YOU JUST THINK, "BOY, NOW'S MY CHANCE. I'M GONNA GET RICH OFF OF THIS TERRIFIC IDEA," AND YOU MAY NOT MAKE IT. AND WHY NOT? AND THE ANSWER -- IT MAY BE THAT YOU HAD A BAD IDEA, BUT -- YOU WANT TO START OFF WITH THAT BLUE SALT IDEA IF YOU START WITH SOMETHING, THOUGH. MAYBE YOU DIDN'T HAVE A GOOD IDEA. BUT MAYBE YOU DID HAVE A GOOD IDEA AND THE ONLY PROBLEM IS YOU STARTED YOUR BUSINESS AT A TIME IN THE BUSINESS CYCLE WHERE THE MACROECONOMY WAS TURNING DOWN AND PEOPLE ARE JUST NOT GONNA HAVE A GOOD, YOU KNOW, GO OF IT AT THOSE TIMES. SO THERE'S THIS CLIMATE OR THERE'S THIS ENVIRONMENTAL THING, THIS MACROECONOMY THING, AND IT'S A POWERFUL FORCE. IT AFFECTS YOU AND ME AND BUSINESS OWNERS -- YOU KNOW, BIG MILLIONAIRES AND SO FORTH THAT OWN BUSINESSES. EVERYBODY'S AFFECTED THE SAME. CANADA'S AFFECTED BY OUR BUSINESS CYCLE. WHEN OUR ECONOMY GOES THROUGH CYCLES, IT DRAGS CANADA ALONG THROUGH THE SAME CYCLE. AND CANADA, OF COURSE, HAS MILLIONS OF PEOPLE LIVING THERE -- I MEAN, THESE ARE JUST MAJOR CYCLES THAT WE'RE TALKING ABOUT.

3 ECO LECTURE TWELVE 3 AND YET WE LIVE IN THE MICROECONOMY. WE DON'T PERCEIVE THESE THINGS MUCH AT ALL. WE JUST -- YOU KNOW, WE HAVE A TENDENCY, I THINK, IN MANY CASES TO BLAMES OURSELVES IF SOMETHING GOES WRONG. YOU GO, "OH, MAN. I LOST MY JOB. I MUST BE A BUM," YOU KNOW. I DON'T KNOW WHAT GOES THROUGH PEOPLE'S MIND WHEN THEY LOSE A JOB, BUT EACH PERSON'S DIFFERENT. BUT THE POINT IS, YOU MIGHT BE BLAMING YOURSELF AND IT MAY BE DUE TO NO CAUSE OF YOUR OWN. AND YOU MAY ALSO THINK, "OH, I'M JUST THE SMARTEST GUY IN THE WORLD. I STARTED UP THIS BUSINESS. EVERYBODY'S BUYING BLUE SALT FROM ME AND I'M JUST GETTING RICH," YOU KNOW. AND I MAY BE CONGRATULATING MYSELF AND YET MAYBE IT'S NOT BECAUSE MY IDEA WAS SO GOOD; IT'S THAT I LAUNCHED MY COMPANY OR MY NEW PRODUCT AT THE RIGHT TIME IN THE BUSINESS CYCLE, WHERE THE ECONOMY IS HEADED UP. I'VE USED THAT TERM A COUPLE TIMES AND LET ME JUST KIND OF INDICATE WHAT I MEAN BY IT. I SAID "BUSINESS CYCLE." MONTH AND YEAR, WE'LL PUT DOWN HERE, AND OVERALL ECONOMY. HOW ABOUT OVERALL ECONOMIC CONDITION. AND WHAT I'M SAYING TO YOU ABOUT A BUSINESS CYCLE IS THE ECONOMY GOES FROM PEAKS AND THEN IT GOES DOWN. IT'S GOT SORT OF BAD TIMES. AND THEN IT REACHES A TROUGH AND THEN IT EXPANDS AGAIN. AND SO WHAT'S HAPPENING IS, WE'RE GOING THROUGH THESE CYCLES OF UP PERIODS AND DOWN PERIODS. LET ME JUST KIND OF LABEL THESE FOR YOU. HERE'S A PEAK. HERE'S A CONTRACTION, SOMETIMES

4 ECO LECTURE TWELVE 4 CALLED A RECESSION. HERE'S THE TROUGH, THE BOTTOM. HERE'S THE EXPANSION AS THE ECONOMY IS GROWING, AND THEN WE REACH A PEAK. AND SO FROM PEAK TO PEAK, THAT'S ONE BUSINESS CYCLE -- OR FROM TROUGH TO TROUGH. IF YOU JUST PICK THE SAME POINT, THEN YOU CAN GO PEAK TO PEAK OR TROUGH TO TROUGH AND IT DOESN'T MAKE ANY DIFFERENCE WHICH. BUT THE POINT IS, IS THAT THE ECONOMY GOES THROUGH THESE CYCLES. AND, BY THE WAY, THE THING THAT WE ALL WANT TO REALIZE: EVEN THOUGH THERE'S CYCLES, EVEN THOUGH WE HAVE THESE DOWNTURNS, THE GENERAL TREND IS UP. IN THE UNITED STATES, WE'VE HAD ECONOMIC EXPANSION OVER THE LONGER TERM FOR AS LONG AS THIS HAS BEEN A COUNTRY. NOW, THAT DOESN'T MEAN WE'VE NOT HAD RECESSIONS OR CONTRACTIONS. BUT WHAT I'M SAYING IS IS THAT LONG- TERM, THE UNITED STATES' ECONOMIC STORY HAS BEEN ONE OF SUCCESS AND ECONOMIC GROWTH. AND THIS THING RIGHT HERE IS SHOWING US GROWTH, THIS TRIMLINE, AND YET WE HAVE A CYCLE AROUND THAT. BY THE WAY -- AND WE'LL COME BACK TO THIS LATER ON. BUT IT USED TO BE -- AND I DON'T ENDORSE THIS AT ALL, SO DON'T BE TAKING IT THAT WAY. BUT IT USED TO BE THAT PEOPLE WOULD SAY, "YOU KNOW, FROM PEAK TO PEAK IN THE BUSINESS CYCLE, OH, THAT'S FOUR TO FIVE YEARS -- OR TROUGH TO TROUGH." BUT THE THINKING WAS ONE BUSINESS CYCLE, ABOUT FOUR OR FIVE YEARS. AND THERE WAS NO PARTICULAR REASON WHY THAT HAD TO BE FOUR TO FIVE YEARS. IT JUST WORKED OUT THAT

5 ECO LECTURE TWELVE 5 WAY. YOU KNOW, WHAT I'M SAYING IS THERE'S NO THEORY THAT SAYS, "YEAH, THIS HAS GOTTA BE FIVE YEARS." WELL, WHAT WE HAD IN RECENT YEARS IS THERE WAS A RECESSION THAT ENDED -- THAT IS TO SAY WE REACHED A TROUGH -- IN NOVEMBER OF '82, THEN THE NEXT PEAK WAS IN 7-90, JULY OF THAT RECESSION ENDED, SO WE REACHED THE TROUGH JUST A FEW MONTHS LATER -- I'M GONNA SAY MARCH OF '91. AND THEN SINCE THEN, THERE'S BEEN NO MORE PEAKS. AND SO IF YOU LOOK AT -- HERE'S ONE BUSINESS CYCLE. THIS LASTED FOR -- WHAT WOULD THAT BE -- ALMOST, WHAT, EIGHT YEARS? EIGHT YEARS AND SOME, EIGHT PLUS YEARS. AND SINCE THEN THERE'S BEEN MORE THAN THAT AND STILL COUNTING. AND SO WHAT I'M SAYING TO YOU IS THIS WHOLE DEAL OF, YEAH, BUSINESS CYCLE ABOUT FOUR OR FIVE YEARS, THAT WOULD'VE NEVER HAD TO BE THAT WAY. AND THINGS HAVE GONE PARTICULARLY WELL FOR US IN RECENT YEARS AND NOW WE'RE HAVING THESE BUSINESS CYCLES THAT SEEM TO STRETCH OUT EIGHT, TEN YEARS. THIS IS A WONDERFUL THING FROM MOST PEOPLE'S POINT OF VIEW. THAT'S ME USING SOME NORMATIVE JUDGMENT THERE, SAYING I LIKE THAT. WELL, I DO LIKE THAT. BUT THERE AREN'T TOO MANY PEOPLE THAT DON'T LIKE IT. NEVERTHELESS, WHAT I'M SAYING IS THE ECONOMY IS PERFORMING BETTER. OUR BUSINESS CYCLES SEEM TO BE STRETCHING OUT. WE SPEND MORE TIME IN THESE EXPANSION PHASES AND SO THERE'S LESS UNEMPLOYMENT AND FEWER ECONOMIC PROBLEMS.

6 ECO LECTURE TWELVE 6 WHAT WE WANT TO DO -- AND I'VE JUST GIVEN YOU A LITTLE BIT OF IT RIGHT HERE, BUT NOT VERY MUCH. WHAT WE WANT TO DO IS TO START OFF TALKING ABOUT THE MACROECONOMY. WE WANT TO TALK ABOUT THREE DIFFERENT CONCEPTS TODAY AND THEN AGAIN NEXT TIME. CONSUMER PRICE INDEX IS THE FIRST. AND BY THE WAY, SOMETIMES THIS IS CALLED THE CPI. WE WANT TO TALK ABOUT THESE THREE CONCEPTS. AND THE REASON FOR TALKING ABOUT THEM SO MUCH TODAY AND NEXT TIME IS THAT WE'LL BE ENCOUNTERING THESE SAME IDEAS OVER AND OVER, AND WE REALLY NEED TO BE FAMILIAR WITH THEM IF WE'RE GOING TO BE TALKING ABOUT THEM SO MUCH. WHAT IS A CONSUMER PRICE INDEX? BASICALLY, IT'S AN INDEX NUMBER THAT ALLOWS US TO TRACE CHANGES OVER TIME IN CONSUMER PRICES. WE'RE TRACING OVER TIME CHANGES IN CONSUMER PRICES. SO IF SOMEBODY SAYS TO YOU, "MAN, IT COSTS A LOT MORE TO LIVE NOW THAN IT USED TO." WELL, THAT PERSON'S PROBABLY REFERRED TO THE CONSUMER PRICE INDEX. AND IF THAT CONSUMER PRICE INDEX IS GOING UP, THERE'S THE CONCLUSION IT COSTS A LOT MORE TO LIVE NOW THAN IT USED TO. WHAT WE LIKE -- AND I'M SAYING DESIRABLE -- LET ME WRITE THIS UP HERE. AND AGAIN, THIS IS A NORMATIVE TERM; YOU REMEMBER THAT? THE CONCEPT OF NORMATIVE MEANS WE PUT A VALUE JUDGMENT ON IT: "HERE'S SOMETHING I LIKE OR DON'T LIKE." WHAT WE LIKE -- MOST PEOPLE DO, POLICYMAKERS LIKE -- WITH RESPECT TO THE CPI, THEY LIKE PRICE STABILITY. SO THAT IS A MAJOR

7 ECO LECTURE TWELVE 7 MACROECONOMIC TARGET THAT POLICYMAKERS HAVE TO SEE IF WE CAN KEEP THE PRICE LEVEL FROM RISING, THE GENERAL PRICE LEVEL. BY THE WAY, THIS IS NOT EVERY SINGLE PRICE. THIS IS AN AVERAGE, REALLY, OF PRICES. AND SO WE COULD KEEP PRICE STABILITY IN THE SENSE OF THE CPI NOT GOING UP, AND YET SOME INDIVIDUAL PRICES WOULD RISE AND OTHER INDIVIDUAL PRICES WOULD FALL. AND SO WHAT WE'RE SAYING IS, ON A MICROECONOMIC LEVEL, INDIVIDUAL MARKETS -- SOME PRICES UP, SOME DOWN. BUT AT THE MACROECONOMY, WE'RE SAYING THOSE OFFSET EACH OTHER. THEY SORT OF BALANCE. AND SO WE DON'T GET AN OVERALL INCREASE IN THE PRICE LEVEL, OKAY? SO ANYWAY, THERE'S OUR FIRST VARIABLE WE'RE GONNA TALK ABOUT. A SECOND ONE, THE UNEMPLOYMENT RATE. WE'LL TALK MORE ABOUT JUST HOW THAT'S MEASURED AND SO FORTH, WHAT GOES INTO IT, LATER ON. BUT THE UNEMPLOYMENT RATE IS A SECOND VARIABLE WE CARE ABOUT. YOU KNOW, WHEN UNEMPLOYMENT GOES UP, OBVIOUSLY PEOPLE ARE OUT OF WORK AND PEOPLE DON'T LIKE THAT. IT'S DIFFICULT TO HAVE A PROSPEROUS NATION IF YOU HAVE INDIVIDUALS THAT ARE NOT PROSPEROUS, INDIVIDUALS WITHIN THE NATION. SO WHAT WE TRY TO DO, WHAT POLICYMAKERS CONSIDER DESIRABLE, IS A LOW UNEMPLOYMENT RATE. SOMETIMES THIS IS EXPRESSED AS THE GOAL OF FULL EMPLOYMENT. FULL EMPLOYMENT. DOES THAT MEAN EVERY SINGLE PERSON'S GOT A JOB? WELL, NO, IT DOESN'T MEAN THAT. WE'LL TALK ABOUT WHAT FULL

8 ECO LECTURE TWELVE 8 EMPLOYMENT MEANS WHEN THE TIME COMES. AND THE THIRD ONE OF THESE MACROECONOMIC VARIABLES THAT WE WANT TO TALK ABOUT IS REAL GROSS DOMESTIC PRODUCT, WHICH I WILL ABBREVIATE RGDP. GDP, GROSS DOMESTIC PRODUCT. AND THE "REAL," WE'LL TALK ABOUT WHAT THAT MEANS AND SO FORTH, BUT THAT IS AN ADJECTIVE. WE'RE SORT OF EXPLAINING WHAT WE MEAN ABOUT THIS GROSS DOMESTIC PRODUCT. DESIRABLE? WE LIKE FOR REAL GROSS DOMESTIC PRODUCT TO GROW. WE LIKE FOR IT TO BE GOING UP. JUST AS WE TALKED ABOUT BEFORE WHEN I WAS TALKING ABOUT THE BUSINESS CYCLE AND I PUT THIS RED TRIMLINE UP HERE, WE LIKE THAT GROWTH IN THE REAL GROSS DOMESTIC PRODUCT. I COULD'VE COME OVER HERE -- IF YOU'LL REMEMBER, A FEW MINUTES AGO I WROTE "OVERALL ECONOMIC CONDITIONS" -- "REAL GDP" IS THE TERM THAT I COULD'VE USED FOR THAT OVERALL ECONOMIC CONDITIONS. THIS IS THE BROADEST MEASURE OF ECONOMIC ACTIVITY. IF SOMEBODY SAYS, "MAN, THE ECONOMY IS STRONG. BOY, THE ECONOMY IS GROWING," AND THAT SORT OF THING, WHAT THEY PROBABLY MEAN IS, REALLY GROSS DOMESTIC PRODUCT IS GOING UP. WE'LL TALK ABOUT HOW THAT'S MEASURED AND WHAT GOES INTO IT AND WHAT'S EXCLUDED FROM IT LATER ON. BUT THESE ARE THE THREE THINGS THAT WE WANT TO TALK ABOUT. AND, LIKE I SAY, THEY WILL SURFACE OVER AND OVER AGAIN, SO YOU'LL BE DOING YOURSELF A DISSERVICE IF YOU DON'T LEARN THESE THINGS AT THIS

9 ECO LECTURE TWELVE 9 POINT BECAUSE THAT WILL MAKE THE REST OF THE SEMESTER MORE CHALLENGING FOR YOU. LET ME DO A LITTLE BIT OF ERASING HERE AND WE'LL GET STARTED TALKING ABOUT THE CONSUMER PRICE INDEX. CONSUMER PRICE INDEX. AS I SAID BEFORE, THIS IS AN INDEX OF PRICES PAID BY THE TYPICAL URBAN CONSUMER. AND I WANT YOU TO UNDERSTAND HERE WHERE I SAY THIS INDEX, WE'RE NOT TALKING ABOUT A PRICE LIKE SIX DOLLARS. THAT'S FOR SURE NOT AN INDEX NUMBER, SIX DOLLARS ISN'T. THAT'S JUST A PRICE. WELL, WE'RE GONNA TALK ABOUT AN AVERAGE OR A BUNCH OF PRICES ALL SORT OF PUT TOGETHER, AND SO WE'LL BE TALKING ABOUT SOMETHING THAT DOESN'T HAVE A DOLLAR SIGN OUT IN FRONT OF IT. IT'S JUST AN INDEX NUMBER. AND WHAT THIS IS EQUAL TO IS THE RATIO OF CONSUMER SPENDING ON A SPECIFIC BASKET OF GOODS IN THE PRESENT PERIOD RELATIVE TO A BASE PERIOD. SO LET'S GO THROUGH AND TALK ABOUT THIS JUST A LITTLE BIT. IT'S A RATIO SO IT'S -- THE CPI IS EQUAL TO ONE THING DIVIDED BY ANOTHER THING. IT'S CONSUMER SPENDING ON A BASKET OF GOODS -- SPENDING ON BASKET IN THE PRESENT PERIOD -- DIVIDED BY SPENDING ON THE SAME BASKET IN THE BASE PERIOD. AND THEN WE'RE GONNA DO ONE MORE THING, WHICH IS WE'RE GONNA MULTIPLY BY A HUNDRED. I'LL TALK ABOUT THAT LATER ON. BUT THE REAL KEY IS THIS IDEA RIGHT HERE, THIS RATIO OF SPENDING ON A BASKET OF GOODS AND SERVICES IN TWO DIFFERENT PERIODS, THE PRESENT PERIOD AND THE BASE PERIOD.

10 ECO LECTURE TWELVE 10 NOW, WE'LL GET MORE TECHNICAL HERE IN A SECOND, BUT LET ME JUST GIVE YOU A GENERAL IDEA OF WHAT I'M TALKING ABOUT. SUPPOSE YOU COULD GO OUT AND BUY THIS BASKET OF GOODS AND SERVICES -- YOU KNOW, I'D BETTER DRAW THAT SHOPPING CART. HEY, THAT'S PRETTY GOOD. I'VE BEEN TO A STORE. BUT YOU WOULDN'T KNOW BY THAT. NOT AN ART SCHOOL THOUGH, APPARENTLY. SUPPOSE THAT YOU GO GET THIS DEFINED BASKET OF GOODS AND SERVICES, AND TODAY THAT BASKET OF GOODS AND SERVICES COSTS EIGHTY DOLLARS TO PURCHASE. AND LET'S SAY THAT WHEN YOU WENT OUT AND BOUGHT EXACTLY THE SAME BASKET OF GOODS AND SERVICES IN SOME BASE PERIOD, SOME BENCHMARK YEAR THAT WE JUST WANT TO USE FOR THE SAKE OF COMPARISON, THEN MAYBE THAT SAME BASKET OF GOODS AND SERVICES COST, OH, LET'S SAY THIRTY DOLLARS. WELL, WHAT YOU CAN SEE IS, "GOSH, THAT BASKET OF GOODS AND SERVICES, THAT COST MORE THAN TWICE AS MUCH AS IT USED TO." AND THAT'S THE INFORMATION THAT WE'RE LOOKING FOR. WHAT WE WOULD HAVE HERE IS IT WOULD BE -- WHAT WOULD THIS BE? TWO POINT -- HELP ME OUT HERE -- SIX SEVEN? IS THAT RIGHT? YEAH. EIGHTY DOLLARS DIVIDED BY THIRTY DOLLARS IS TWO POINT SIX-SEVEN. HEY, THAT'S RIGHT. TWO POINT SIX SEVEN TIMES A HUNDRED EQUALS TWO SIXTY-SEVEN. I'M COUNTING ON YOU TO CORRECT ME IF MY MATH IS WRONG. HERE'S WHAT THAT SAYS. THIS TWO SIXTY-SEVEN, OR THE TWO POINT SIX SEVEN, THAT BASICALLY SAYS, "GOSH, GOODS AND SERVICES NOW ARE

11 ECO LECTURE TWELVE 11 TWO AND TWO-THIRDS TIMES AS EXPENSIVE AS THEY WERE PREVIOUSLY IN THAT BASE PERIOD." NOT QUITE THREE TIMES AS EXPENSIVE, BUT MORE THAN TWICE AS EXPENSIVE. AND SO IF YOU SEE THIS CONSUMER PRICE INDEX IS TWO SIXTY-SEVEN? GOSH, PRICES HAVE MORE THAN DOUBLED SINCE THE BASE PERIOD. IF YOU SAW THAT CONSUMER PRICE INDEX IS FOUR HUNDRED? GOSH, PRICES HAVE QUADRUPLED SINCE THAT BASE PERIOD. NOW, WHEN'S THE BASE PERIOD? WELL, IT'S 1982 THROUGH '84. THEY'VE PICKED THIRTY-SIX MONTHS FOR RIGHT NOW. THAT'LL CHANGE IN THE FUTURE. BUT REALLY IT DOESN'T MAKE ANY DIFFERENCE WHEN THE BASE PERIOD IS. IT'S ONLY FOR THE PURPOSES OF COMPARISON. AND SO WHENEVER WE WOULD DECIDE TO MAKE THIS BASE YEAR -- SOMETIMES IT'S CALLED A BASE YEAR RATHER THAN THE BASE PERIOD. BUT WHENEVER THAT BASE YEAR IS DOESN'T REALLY MAKE A DIFFERENCE. IT'S JUST A BENCHMARK. WE HAVE TO PICK SOME POINT IN TIME AND PRICE THAT BASKET OF GOODS AND SERVICES THEN, AND FROM THEN ON EVERYTHING'S RELATIVE TO THAT. OKAY. SO THE NEXT YEAR MAYBE THIS PRICE OF GOODS -- OF THE BASKET OF GOODS AND SERVICES IS NINETY DOLLARS. THAT'S NEXT YEAR. AND SO NOW THE CPI, THE CONSUMER PRICE INDEX, WOULD BE THREE HUNDRED. YOU GET THE IDEA. WE'RE JUST COMPARING AGAIN WHAT HAPPENS TO THE PRICE FROM THAT BASE PERIOD. OKAY. QUESTIONS ABOUT THIS? BE SURE TO STOP ME IF YOU DO HAVE A QUESTION.

12 ECO LECTURE TWELVE 12 WELL, JUST WHAT I DIDN'T WANT. I LOOKED AT MY NOTES AND IT TOLD ME TO MAKE UP A HARD PROBLEM AND WORK IT FOR YOU, AND SO THIS IS MY OPPORTUNITY TO MAKE A MISTAKE. SUPPOSE THAT, WHAT, THE PEOPLE WHO CALCULATE THE CONSUMER PRICE INDEX -- LET'S SAY THAT THEY'VE GOT FOUR DIFFERENT GOODS IN THIS BASKET. AND THAT'S ALL WE'RE TALKING ABOUT IS WHAT'S IN THE CONSUMER'S BASKET. FOUR DIFFERENT GOODS. WE'LL SAY THAT THE GOODS ARE A, B, C, AND D. OH, WE'VE BEEN CALLING 'EM X AND Y, HAVEN'T WE? SOMETHING ELSE. BUT NOW THE GOODS ARE A, B, C, D. AND LET'S SUPPOSE THAT IN THE BASKET WE'VE GOT THESE QUANTITIES, AND LET'S SAY THAT THERE ARE TWO A'S AND THREE B'S AND TWO C'S AND FOUR D'S. THIS IS IN THE BASKET. IN THE BASKET. IN THE BASKET OF WHO? A TYPICAL URBAN CONSUMER -- URBAN CITY. THIS IS THE CONSUMER PRICE INDEX AND IT REFERS TO PEOPLE LIVING IN CITIES, OKAY, WHICH IS ABOUT EIGHTY PERCENT OF THE POPULATION. MORE ON THAT LATER. PRICE IN THE BASE PERIOD. LET'S PICK SOME NUMBERS HERE. TWO DOLLARS, ONE DOLLAR, FOUR DOLLARS, THREE DOLLARS. THAT'S THE BASE PERIOD PRICE. WELL, LET'S PICK A PRICE TODAY -- PRICE CURRENT -- AND LET'S SAY THESE PRICES ARE TWO, THREE, FOUR, FIVE. WHERE AM I COMING UP WITH THESE NUMBERS? LEARNED 'EM IN GRADE SCHOOL. THEY'RE JUST SIMPLE NUMBERS. BUT WHAT WE NEED TO DO IS DEAL WITH THE SITUATION THAT, YOU KNOW, A PERSON MIGHT CONFRONT IN REALITY OTHER THAN THE A, B, C, D.

13 ECO LECTURE TWELVE 13 BUT THE POINT IS, WE'VE DEFINED CERTAIN GOODS AND THE QUANTITIES PEOPLE BUY, HOW MUCH DID THEY COST IN THAT BENCHMARK YEAR AND THAT BASE YEAR, AND HOW MUCH DO THEY COST TODAY. AND NOW WHAT WE WANT TO DO IS WE WANT TO CALCULATE THE COST OF THAT BASKET. COST OF BASKET. AND I'LL PUT UP HERE THE BASE YEAR -- AND THE BASE PERIOD, BASE YEAR. TWO UNITS AT TWO DOLLARS APIECE IS FOUR DOLLARS. GETTING THE HANG OF IT? THREE UNITS AT ONE DOLLAR APIECE IS THREE DOLLARS. NOW I'M ON TO THIS. TWO UNITS AT FOUR DOLLARS APIECE, EIGHT DOLLARS. FOUR AND THREE IS TWELVE. NOT FOUR AND THREE. FOUR TIMES THREE IS TWELVE. SO WHAT DOES THIS BASKET COST TO BUY? SEVENTEEN DOLLARS. THAT DOES NOT INCLUDE THE BASKET; THAT'S JUST THE CONTENTS. [STUDENT SPEAKING INAUDIBLE] PARDON ME AND THANK YOU. OH, I MEAN, I WAS JUST TESTING TO SEE IF YOU WERE PAYING ATTENTION. PLEASE PAY ATTENTION SOME MORE. OH, THAT'S NOT WHERE THAT GOES. WHAT IS THE COST TO BUY THIS BASKET NOW? TWO UNITS TIMES TWO DOLLARS APIECE - - BY NOW IT'S CURRENTLY. OH, I BETTER WRITE MYSELF A -- COST O BASKET. THAT BASKET, TWO UNITS TIMES TWO DOLLARS APIECE IS FOUR DOLLARS. GOOD B, THREE UNITS, THREE DOLLARS APIECE IS NINE DOLLARS. GOOD C, WE'RE BUYING TWO UNITS IN THE BASKET TIMES FOUR DOLLARS APIECE IS EIGHT DOLLARS. FOUR TIMES FIVE IS TWENTY. IS IT FORTY-ONE NOW? LET ME GET THE CALCULATOR OUT. CPI EQUALS THE PRICE OF THE BASKET IN THE CURRENT YEAR FORTY-ONE DIVIDED BY THE PRICE OF THE

14 ECO LECTURE TWELVE 14 BASKET IN THE BASE YEAR TWENTY-SEVEN, TIMES A HUNDRED EQUALS -- FORTY-ONE DIVIDED BY TWENTY-SEVEN IS ONE POINT FIVE ONE EIGHT FIVE TIMES A HUNDRED EQUALS ONE FIFTY-ONE POINT NINE. ANYBODY GET A DIFFERENT ANSWER? BE SURE AND TELL ME IF YOU DID. HERE'S WHAT THIS TELLS ME. PRICES ARE ABOUT HALF AGAIN AS MUCH AS THEY WERE TO BEGIN WITH. NOT ALL PRICES. SOME PRICES -- LET'S SEE. PRICE TWO TO TWO, THERE WAS NO CHANGE IN THAT PRICE. HERE THAT PRICE TRIPLED, HERE'S ONE THAT DIDN'T CHANGE. HERE'S ONE THAT WENT UP BY SIXTY PERCENT. BUT THE AVERAGE -- AND IT'S A WEIGHTED AVERAGE. WE'RE WEIGHTING EACH ONE OF THESE PRICES BY HOW MUCH DO CONSUMERS BUY. BUT THIS WEIGHTED AVERAGE IS TELLING US THAT THE AVERAGE PRICE WENT UP BY ABOUT -- A LITTLE OVER FIFTY PERCENT, BUT ABOUT FIFTY-TWO PERCENT. QUESTIONS ABOUT THIS? I WOULD EXPECT ON TEST DAY THAT YOU WOULD BE GIVEN A BUNCH OF NUMBERS LIKE EVERYTHING ABOVE MY ARM HERE, AND THEN YOU'D BE TOLD TO, HEY, CALCULATE THE CONSUMER PRICE INDEX FOR ME. AND THEN YOU'D HAVE TO KNOW -- WELL, I DON'T THINK YOU'D BE GIVEN THESE NUMBERS RIGHT HERE, THAT I'VE WRITTEN IN BLACK, 'CAUSE THAT'D BE YOUR RESPONSIBILITY. SO YOU'D BE GIVEN THESE NUMBERS THAT ARE IN RED -- HOW'S THAT? -- ABOVE MY ARM. AND THEN YOU -- I WON'T ALWAYS HAVE MY ARM THERE, THOUGH, SO YOU SHOULD LEARN THIS SOME OTHER WAY. AND THEN YOU'D BE RESPONSIBLE FOR FIGURING OUT HOW TO GO AHEAD AND CALCULATE THE COST OF THIS BASKET, DIVIDE THE ONE BY THE

15 ECO LECTURE TWELVE 15 OTHER, MULTIPLY BY A HUNDRED. WHY DO WE MULTIPLY BY A HUNDRED? AND THE ANSWER IS, BECAUSE THE WAY THE CONSUMER PRICE INDEX IS STATED, WE DON'T LEAVE IT AS THE ONE POINT FIVE ONE. WE WANT IT TO READ A HUNDRED A FIFTY-ONE. NOT "WE" ME, BUT I MEAN THE LABOR DEPARTMENT THAT CALCULATES THIS. AND THAT BEING THE CASE, WE MULTIPLY BY A HUNDRED. NOW, SINCE WE'VE MULTIPLIED BY A HUNDRED, LATER ON WHEN WE USE THE CONSUMER PRICE INDEX, SOMETIMES WE HAVE TO DIVIDE BY A HUNDRED TO GET THAT OUT OF THERE. NEVERTHELESS, WE WON'T WORRY ABOUT THAT RIGHT NOW. THAT'S THE ONLY ROLE THAT THE ONE HUNDRED PLAYS, THOUGH, IS TO GET THESE NUMBERS FROM BEING TWO POINT SIX SEVEN AND MAKE 'EM TWO HUNDRED AND SIXTY-SEVEN. IF THE PRICE LEVEL HAD NOT CHANGED -- THAT IS TO SAY WE BOUGHT THIS BASKET IN THE BASE YEAR AND THEN WE COME BACK IN ANOTHER YEAR AND IT STILL COSTS TWENTY-SEVEN DOLLARS, THEN THE CONSUMER PRICE INDEX WOULD BE ONE HUNDRED, RIGHT? ANY QUESTIONS ABOUT THIS? PRETTY STRAIGHTFORWARD STUFF, I THINK. [STUDENT SPEAKING INAUDIBLE.] I SAID THAT THE PRICE LEVEL WENT UP -- IT'S A LITTLE MORE THAN FIFTY PERCENT HIGHER THAN IT WAS TO BEGIN WITH. FIFTY-TWO PERCENT IS CLOSER. FIFTY-ONE POINT NINE PERCENT IS EXACT. NO? YOU AGREE WITH IT? OKAY. IF YOU DON'T AGREE, YOU KNOW, BE SURE AND TELL ME. I COULD BE WRONG. HERE'S ANOTHER WAY OF INTERPRETING THIS. GOODS AND SERVICES

16 ECO LECTURE TWELVE 16 THAT COST A HUNDRED DOLLARS IN THE BASE YEAR, IN BASE YEAR, NOW COST A HUNDRED AND FIFTY-ONE DOLLARS AND NINETY CENTS. AND THAT'S KIND OF A WAY THAT A LOT OF PEOPLE THINK OF THIS, IN THESE TERMS. THERE'S DIFFERENT WAYS YOU CAN INTERPRET IT. BUT A HUNDRED DOLLARS WORTH OF GOODS AND SERVICES IN THE BASE YEAR NOW WOULD COST YOU A HUNDRED AND FIFTY-ONE DOLLARS AND NINETY CENTS. WE WEREN'T BUYING A HUNDRED DOLLARS WORTH; WE WERE BUYING TWENTY- SEVEN DOLLARS WORTH AND THEN FORTY-ONE. BUT IF YOU WERE BUYING A HUNDRED DOLLARS WORTH, NOW THE COST OF THAT HUNDRED DOLLARS WORTH OF GOODS AND SERVICES WOULD'VE GONE UP BY ALMOST FIFTY- TWO PERCENT. ANY QUESTIONS ABOUT THAT? OKAY. LET'S JUST GO THROUGH AND TALK A LITTLE BIT ABOUT THE CPI: WHERE IT COMES FROM, WHO CALCULATES IT, AND SO FORTH. ONE, WHERE DOES IT COME FROM? AND THE ANSWER IS, WASHINGTON, D.C. CALCULATES -- NOT THE WHOLE TOWN, BUT PEOPLE IN WASHINGTON, D.C. CALCULATE THE CONSUMER PRICE INDEX. THERE'S AN OFFICE CALLED THE BUREAU OF LABOR STATISTICS, OR BLS, AND THEY CALCULATE THE CONSUMER PRICE INDEX. NOW, WHY DO THEY DO THAT? AND THE ANSWER IS, THE LABOR DEPARTMENT IS ORIGINALLY STARTED AND THEN WITHIN THE LABOR DEPARTMENT THE BUREAU OF LABOR STATISTICS WAS STARTED IN ORDER TO BASICALLY PROVIDE SERVICES TO WORKERS. AND I DON'T MEAN TO SAY INDIVIDUAL WORKERS, BUT THAT BROAD CATEGORY OF WORKERS. AND ONE THING THAT WORKERS NEED TO KNOW IS, THEY NEED TO

17 ECO LECTURE TWELVE 17 KNOW, "HEY, ARE THE COSTS OF LIVING GOING UP? IF IT'S COSTING MORE TO LIVE NOW THAN IT USED TO, I'D LIKE TO HAVE A RAISE TO KEEP UP WITH THAT COST OF LIVING." AND SO AS A SERVICE TO WORKERS, UNION WORKERS AND NON-UNIONIZED WORKERS, BUT AS A SERVICE TO THE WORKERS, THEN THE GOVERNMENT CALCULATES THIS COST OF LIVING, PROVIDES THAT INFORMATION TO EVERYBODY IN THE ECONOMY. AND THEN WHEN WORKERS ARE BARGAINING FOR WAGES, THEY CAN TAKE THIS INTO ACCOUNT. "OH, THE COST OF LIVING HAS RISEN TEN PERCENT SINCE LAST YEAR AND SO I THINK YOU OUGHT TO GIVE ME A RAISE OF TEN PERCENT." THAT SORT OF AN IDEA. AS I SAY, THIS IS A BUREAU WITHIN THE LABOR DEPARTMENT, U.S. DEPARTMENT OF LABOR, AND THE U.S. DEPARTMENT OF LABOR IS ONE OF THOSE CABINET LEVEL DEPARTMENTS OF THE GOVERNMENT. THEY'VE GOT OFFICES SCATTERED AROUND THE UNITED STATES IN ADDITION TO WASHINGTON, D.C., BUT THEY HAVE LIKE OFFICES IN ST. LOUIS AND KANSAS CITY. NOT HERE IN SPRINGFIELD. OKAY. THIS IS CALCULATED MONTHLY -- BY "THIS," I MEAN THE CONSUMER PRICE INDEX IS CALCULATED MONTHLY -- AND IT HAS BEEN FOR MANY, MANY YEARS. NOT FOREVER, BUT FOR A LONG TIME. AND, IN FACT, BEFORE THE CONSUMER PRICE INDEX WAS CALCULATED, THERE WERE SOME NUMBERS COLLECTED AND SO NOW ECONOMISTS WITH THE BUREAU OF LABOR STATISTICS HAVE GONE BACK AND CALCULATED SORT OF A CPI GOING BACK INTO THE 1800S OR EARLY 1900S, I'M NOT SURE WHICH. I WONDER IF I'VE

18 ECO LECTURE TWELVE 18 GOT ANYTHING HERE THAT TELLS ME? 1913 IS THE FIRST YEAR I HAVE. BUT I THINK THEY'VE DONE SOME WORK GOING BACK INTO THE 1800S, ESTIMATING WHAT THE CPI WOULD'VE BEEN EVEN PREVIOUSLY. OH, AND YOU WANT TO KNOW HOW MUCH THE CPI WAS IN 1913? IN JANUARY, 1913, IT WAS NINE POINT EIGHT. AND NOW IT'S MORE LIKE A HUNDRED AND SIXTY-FIVE. SO NINE POINT EIGHT TO A HUNDRED AND SIXTY- FIVE. PRICES ARE -- WHAT WOULD THAT BE -- SIXTEEN, SEVENTEEN TIMES AS HIGH TODAY AS THEY WERE IN THE -- WHAT DO WE HAVE HERE? THE PRICES -- LET'S SEE HOW I WANT TO SAY THIS. THOUSANDS OF PRICES -- THERE WE GO -- ARE SAMPLED. THAT IS TO SAY, THE MARKET BASKET DOESN'T HAVE THOUSANDS OF GOODS AND SERVICES IN IT; IT'S GOT DOZENS OF GOODS AND SERVICES. BUT THEN THE BUREAU OF LABOR STATISTICS PEOPLE, THEY GO OUT -- WELL, LET'S TAKE CHITOS. I LIKE -- YOU KNOW, THOSE LITTLE YELLOW CHEESE THINGS THAT YOU EAT 'EM AND THEY MAKE YOUR LIPS ALL YELLOW, AND ALL THAT STUFF. I LOVE THOSE THINGS. ANYWAY, LET'S SAY THAT THOSE ARE IN THE CONSUMER BASKET. I'M TEACHING THE CLASS, SO WE'RE PUTTING CHITOS IN THE BASKET. SO ANYWAY, LET'S JUST SUPPOSE THAT CHITOS ARE IN THAT BASKET. THEY'LL GO OUT AND PRICE THOSE CHITOS IN SEVERAL DIFFERENT STORES AND IN DIFFERENT CITIES AND SO FORTH. SO THOUSANDS OF PARTICULAR PRICES ARE SAMPLED EVERY SINGLE MONTH. AND I'M SAYING NOT JUST ONE OR TWO THOUSAND, EITHER; BUT LIKE TEN, TWELVE THOUSAND. OKAY.

19 ECO LECTURE TWELVE 19 THIS BASKET IS FOR THE TYPICAL URBAN HOUSEHOLD. THAT IS TO SAY, THE GOODS AND SERVICES IN THAT BASKET, LIKE THE CHITOS THAT EVERYBODY LIKES TO EAT, THOSE THINGS ARE THE GOODS AND SERVICES PURCHASED BY THE TYPICAL URBAN HOUSEHOLD. AND THIS IS ABOUT EIGHTY PERCENT OF FAMILIES. PROBABLY INCLUDING YOUR FAMILY AND MY FAMILY. THIS IS A -- AND THAT DOESN'T MEAN THEY SURVEY US. THEY GO TO THE STORES AND DO THE SURVEYING. BUT THE POINT IS, IS THAT THESE ARE THINGS TO FIND OUT WHAT GOES INTO THAT BASKET. EVERY ONCE IN AWHILE THE LABOR DEPARTMENT GOES OUT AND SURVEYS THAT URBAN HOUSEHOLD AND SAYS, "HEY," YOU KNOW, "HOW MANY CHITOS ARE YOU BUYING?" AND THE PEOPLE ARE SAYING, "OH, MAN, I DON'T KNOW. I EAT A BAG OF 'EM EVERY DAY, I THINK." SO ANYWAY, THE IDEA IS THEY SURVEY THAT URBAN HOUSEHOLD, DECIDE WHAT'S IN THE BASKET, AND THEN GO OUT EVERY MONTH AND FIND OUT BASICALLY WHAT DOES IT COST TO BUY THE GOODS AND SERVICES IN THAT BASKET. WHAT DO THEY SURVEY? SOMETHING LIKE BETWEEN FIFTY AND SIXTY THOUSAND FAMILIES, THOUGH, THAT THEY SURVEY IN ORDER TO FIND OUT WHAT PEOPLE CONSUME. THIS BASE YEAR -- BASE PERIOD, I'LL SAY; USUALLY IT'S CALLED THE BASE YEAR -- IS 1982 THROUGH '84, WHICH IS THIRTY-SIX MONTHS. SO WHAT HAPPENED IS OVER THAT THREE-YEAR PERIOD -- '82, '83, '84 -- THE LABOR DEPARTMENT WENT OUT AND FOUND OUT THE COST OF PURCHASING THE GOODS AND SERVICES IN THIS BASKET, AND THEN AVERAGED THOSE

20 ECO LECTURE TWELVE 20 THIRTY-SIX OBSERVATIONS, THOSE THIRTY-SIX MONTHS. AND THAT'S WHAT GOES IN THE DENOMINATOR FOR THE BASE YEAR IS THE AVERAGE OVER THOSE THIRTY-SIX MONTHS. AND SO NOW IF SOMEBODY TELLS YOU THAT THE CONSUMER PRICE INDEX IS, I DON'T KNOW, TWO HUNDRED, THEN WHAT THEY MEAN IS PRICES NOW ARE TWICE AS HIGH AS THEY WERE IN THAT THIRTY-SIX MONTH PERIOD, THAT BASE PERIOD. THERE'S A BIAS IN THE CPI. I THINK IT'S BIASED AGAINST ME. BUT THE BIAS IS, IT OVERSTATES INFLATION. IT MAKES INFLATION SEEM WORSE THAN IT REALLY IS. NOW, WHY DOES IT DO THAT? AND THE ANSWER IS, THERE'S SEVERAL REASONS THAT IT DOES BUT LET ME JUST MENTION A COUPLE. BUT WHAT HAPPENS OVER TIME IS THIS: PRODUCTS IMPROVE. YOU KNOW, IF YOU GO BACK TO THE 1960S OR '70S AND FIND THE VERY FINEST CAR THAT YOU COULD LOCATE THEN, AND THEN YOU SET IT HERE AND YOU GOT OUT AND FIND THE FINEST CAR YOU CAN BUY TODAY AND SET IT RIGHT NEXT TO IT, AND YOU LOOK AT 'EM AND THERE'S A BIG DIFFERENCE IN THOSE CARS. THE NEWER CAR'S GOT A SMOOTHER RIDE; THE NEWER CAR IS SAFER; THE NEWER CAR'S QUIETER; THE NEWER CAR'S GOT A BETTER STEREO; THE NEWER CAR NEEDS TUNED UP ONCE EVERY HUNDRED THOUSAND MILES RATHER THAN ONCE EVERY TWELVE THOUSAND MILES. THERE'S A HUGE DIFFERENCE BETWEEN THESE CARS. AND SO SINCE THERE'S PRODUCT IMPROVEMENT, IF WE SAY THAT THE PRICE OF A GOOD HAS GONE UP -- "OH, LOOK. THAT CAR NOW COSTS THIRTY THOUSAND DOLLARS; USED TO BE IT ONLY COST TEN THOUSAND DOLLARS" --

21 ECO LECTURE TWELVE 21 THEN WHAT WE'RE NOT RECOGNIZING IS, PART OF THE REASON FOR THAT INCREASE FROM THE TEN THOUSAND DOLLARS IT USED TO BE FOR THAT CAR THIRTY YEARS AGO, FORTY YEARS AGO, TO WHAT IT COSTS NOW FOR THAT CAR, PART OF THE INCREASE IN THE PRICE IS NOT DUE TO THE FACT THAT THEY'RE RAISING THE PRICE OF THE CAR BUT DUE TO THE FACT THAT THEY'RE IMPROVING THE CAR. IT'S GOT AIRBAGS ON IT. IT'S GOT FRONT AIRBAGS, IT'S GOT SIDE AIRBAGS. WHAT'S NEXT? AIRBAGS FOR ROLLOVERS, YOU KNOW, UP IN THE CEILING. BUT ANYWAY, PRODUCT IMPROVEMENT. THE LABOR DEPARTMENT, THE BUREAU OF LABOR STATISTICS, THEY -- PARTLY THEY TRY TO ACCOUNT FOR THAT, BUT THEY DON'T ALWAYS DO THE BEST JOB OF IT. AND SO THERE'S STILL A LITTLE BIT OF BIAS IN THERE. THERE'S ANOTHER BIAS REGARDING THE PLACES WHERE PEOPLE SHOP. WHAT'S HAPPENING OVER TIME IN OUR ECONOMY IS THIS: WE'RE DEVELOPING MORE AND MORE EFFICIENT WAYS OF RETAILING MERCHANDISE. USED TO BE -- AND I'M SAYING, YOU KNOW, USED TO BE FIFTY, SIXTY YEARS AGO, YOU'D BUY YOUR GROCERIES AT THE MOM 'N POP'S GROCERY STORE IN YOUR NEIGHBORHOOD. AND THEN WHAT HAPPENS IS, MOM 'N POP GOT SURPASSED BY SUPERMARKETS -- SEARS, A&P, AND A FEW OF THESE OTHER SUPERMARKET CHAINS. AND THEY WOULD BE, YOU KNOW, TEN THOUSAND SQUARE FEET, FIFTEEN THOUSAND SQUARE FEET, AND THE AISLES WOULD BE THERE, AND THEY'D HAVE THE REFRIGERATED PLACES WHERE THEY WOULD KEEP THE, WHAT, VEGETABLES AND MEATS AND

22 ECO LECTURE TWELVE 22 THINGS LIKE THAT. AND THEN THE NEXT THING -- YOU KNOW, AND IT JUST KEPT ON IMPROVING. AND THEN WAL-MART GETS INTO THE BUSINESS AND YOU'VE GOT THE SUPERCENTERS WITH HUGE GROCERY STORE OPERATIONS. I DON'T KNOW WHAT'S NEXT. EVERYTHING'S GOING TO THE INTERNET SO MAYBE WE'LL BE BUYING GROCERIES OFF OF THE INTERNET. "YEAH, SEND ME OVER A POUND OF BACON." I DON'T KNOW HOW IT WOULD GET TO ME. BUT ANYWAY, THE POINT IS IS THAT OVER TIME, WE'RE SHOPPING AT DIFFERENT PLACES. AND IF WE ARE SHOPPING AT DIFFERENT -- AND WHY DO WE SHOP AT DIFFERENT PLACES? AND THE ANSWER IS: TO GET A BETTER DEAL. WE DON'T JUST SAY, "WELL, YOU KNOW, I'VE BEEN SHOPPING AT MOM 'N POP'S FOR YEARS. I'M JUST SICK AND TIRED OF THAT. I THINK I'D RATHER GO TO A SUPERMARKET." THAT'S NOT HOW IT WORKS. THERE'S MOM 'N POP'S. EVERYBODY'S HAPPY GOING TO MOM 'N POP'S. THERE'S A SUPERMARKET AND THEN PEOPLE START SAYING, "GOSH, THIS SUPERMARKET IS A LITTLE CHEAPER THAN MOM 'N POP'S." WELL, IF WE WERE PRICING THESE GOODS, THE ONES THAT ARE IN THE BASKET, IF WE WERE PRICING THOSE TO BEGIN WITH DOWN AT MOM 'N POP'S, AND WE KEEP ON PRICING EVERY SINGLE MONTH, GO TO MOM 'N POP'S AND ASK HOW MUCH FOR A BAG OF CHITOS, BUT IN REALITY PEOPLE AREN'T SHOPPING AT MOM 'N POP'S ANYMORE. THEY'RE GOING OVER TO THE SUPERMARKET OR THE SUPERCENTER OR THE INTERNET GROCERY STORE, OR WHATEVER. THEN WHAT THAT MEANS IS, PEOPLE ARE GETTING A

23 ECO LECTURE TWELVE 23 BETTER DEAL THAN WHAT YOU WOULD THINK BY JUST LOOKING AT THE MOM 'N POP'S APPROACH. SO THAT'S TAKING PLACE. THERE ARE OTHER THINGS THAT WE COULD TALK ABOUT HERE. I WON'T SPEND A LOT OF TIME TALKING ABOUT IT, BUT I'LL JUST SAY THAT THERE ARE THINGS LIKE THIS -- WHERE WE ARE CHANGING OUR BEHAVIOR. AND IT'S THE BUREAU OF LABOR STATISTICS -- IT'S THEIR JOB TO KEEP UP WITH WHAT WE'RE DOING: WHAT'RE WE BUYING, WHERE ARE WE BUYING IT, WHAT'S BEING PRODUCED, IS IT A BETTER PRODUCT OR WHATEVER? AND I'M SAYING TO YOU THAT THEY DON'T DO THE BEST JOB OF KEEPING UP WITH THIS. THEY PROBABLY DO A BETTER JOB THAN I COULD. BUT I'M JUST SAYING, THIS IS NOT PERFECT. LET ME MENTION TO YOU THAT IF YOU LOOK BACK -- THERE WAS SOMETHING CALLED THE BOSKIN COMMISSION -- LET ME WRITE THIS DOWN, BOSKIN COMMISSION -- THAT STUDIED THIS PROBLEM BACK IN I THINK IN DECEMBER THEY RELEASED THEIR REPORT. AND HERE'S WHAT THE COMMISSION SAID. THEY SAID, "LOOKING BACK, WE THINK THAT THE CPI OVERSTATES INFLATION BY ABOUT ONE POINT THREE PERCENT PER YEAR." LOOKING BACK, THEY THOUGHT THE -- THE BOSKIN COMMISSION -- AND BY THE WAY, THIS WAS NAMED AFTER A GUY NAMED MICHAEL BOSKIN WHO IS A LEADING ECONOMIST. THEY SAID THAT, "WE THINK THE CPI OVERSTATES INFLATION BY ABOUT ONE POINT THREE PERCENT A YEAR." THAT'S LOOKING BACK. "LOOKING FORWARD, WE THINK IT'S CONTINUING TO OVERSTATE INFLATION BY ABOUT ONE PERCENT A YEAR, ONE POINT ONE

24 ECO LECTURE TWELVE 24 PERCENT A YEAR." SINCE THAT COMMISSION DID ITS REPORT, THEN THE BUREAU OF LABOR STATISTICS HAS DONE SOME NEW THINGS, SOME DIFFERENT THINGS, AND HAS GOTTEN RID OF ABOUT HALF OF THIS PROBLEM. THAT IS TO SAY, PROBABLY RIGHT NOW THE CPI IS ABOUT A HALF OR POINT SIX PERCENT OVERSTATING INFLATION RIGHT NOW. FINAL POINT I'LL MAKE TODAY. THE CONSUMER PRICE INDEX -- LET ME WRITE THAT DOWN HERE -- IS NOT THE COST OF LIVING. PEOPLE WILL SAY SOMETHING LIKE, "OH, LOOK. THE CONSUMER PRICE INDEX WENT UP." THE COST OF LIVING ROSE. THAT'S PROBABLY RIGHT. BUT STRICTLY SPEAKING, THERE ARE COSTS OF LIVING THAT ARE NOT INCLUDED IN THAT BASKET. SO STRICTLY SPEAKING, THAT IS NOT THE COST OF LIVING. IT'S THE COST OF THAT BASKET AND HOW IT CHANGES OVER TIME. THAT'S ALL FOR TODAY. WE'LL PICK UP WITH THIS NEXT TIME AND GO ON AND TALK ABOUT THOSE OTHER TOPICS. SO LONG.