Chapter 24: Measuring the Cost of Living

 Chapter 24 is looking at the other side of the economy: the consumers and their cost of living. Instead of measuring GDP, to find the cost of living for consumers (households), we must find the CPI, or the consumer price index. While this form of measuring and comparing prices has many flaws/problems, many economists still use it and relate it to the producer price index. In order to find the value of CPI, you must first construct a basket of goods and then follow steps in order to achieve a value of the entire basket's value. By doing so, you can now have a base year which is helpful in order to compare the CPI's of other years. By comparing the base year with other years, economists can find the inflation rate of prices.

Another topic mentioned in this chapter was the term, indexation. Indexation is the automatic correction of a dollar amount for the effects of inflation by law or contract. This can also be called the cost-of-living allowance, or the COLA. COLA is the place where most transfer payments go, such as Social Security payments, unemployment, tax returns, etc. Discussing tax rates, there is a difference between Real and Nominal Interest rates. Nominal rates are the  interest rates as usually reported without the correction for the effects of inflation. Real, however, is the interest rate already corrected for inflation.

Overall, I would give this chapter a rating of 2.5 because it was a very short read and it had many similar topics discussed in the previous chapter. The only reason I decided to deducted a half point was because I still don’t feel comfortable with indexation and would like some more clarification on this.