Chapter 24

Chapter 24 discusses the cost associated with being a part of society and how to measure those costs. There are two tools Gross Domestic Product (GDP) Deflator and the Consumer Price Index (CPI). The consumer price index shows the cost of a basket of goods and services relative to the cost of the same basket in the base year. The index is used to measure the overall level of prices in the economy. The percentage change in the consumer price index measures the inflation rate. The consumer price index is not a perfect measure of the cost of living because it does not take into account consumers’ ability to substitute goods that become relatively cheaper over time, it does not take into account increases in the purchasing power of the dollar due to the introduction of new good, it is distorted by unmeasured changes in the quality of goods and services. Because of these measurement problems, the CPI overstates annual inflation by about 1 percentage point. The GDP deflator also measures the overall level of prices in the economy, it differs from the consumer price index because it includes goods and services produced rather than goods and services consumed. As a result, imported goods affect the consumer price index but not the GDP deflator. In addition, whereas the consumer price index uses a fixed basket of goods, the GDP deflator automatically changes the group of goods and services over time as the composition of GDP changes.

I took AP Human Geography my freshman year, where I learned about quality of life and GDP but we never talked about what goes into actually measuring them. It is interesting to see the economic side of this aspect of society.