The US Bureau of Labor Statistics calculates inflation by taking samples of pric
ID: 1168158 • Letter: T
Question
The US Bureau of Labor Statistics calculates inflation by taking samples of prices for a “basket of goods and services” a “typical consumer” would purchase. Each good and service is assigned a “weight” or percentage of income spent on that product. For example, “cakes, cupcakes, and cookies” are given a weight of 0.197. This means that about 0.2% of the “average” household spending is made on these items. Of course, an individual’s spending may vary significantly from the hypothetical basket of goods and services. In this assignment, you will review the BLS’s “Relative importance of components in the Consumer Price Indexes” and compare how your household spending measures up to the “typical consumer’s.”
Part I
Considering your own household budget, divide up your spending into these eight broad categories:
How closely does your household spending correlate to the “typical consumer’s”? How might your household be disproportionately affected by a change in one of these broad categories? Do you believe that the government’s weightings are an accurate approximation for the whole economy?
Category CPI Weight Your Budget Food and beverages 14.8 Housing 41.5 Apparel 3.6 Transportation 17.3 Medical Care 6.6 Recreation 6.3 Education & Communication 6.4 Other 3.5 Total 100 100Explanation / Answer
Following table shows our household budget divided into given eight broad categories –
Category
CPI Weight
Our Budget
Food and Beverages
14.8
15
Housing
41.5
40
Apparel
3.6
3.2
Transportation
17.3
16.9
Medical Care
6.6
6.8
Recreation
6.3
6.5
Education and Communication
6.4
6.9
Other
3.5
3.7
Total
100
100
Close comparison of our household spending with that of a ‘typical consumer’s’ shows that our spending is more or less on similar lines as that of the typical consumer.
As table shows that there are certain categories such as Food and Beverages, Housing, and Transportation etc. on which spending is considerable with respect to our overall budget.
If cost pertaining to any of these categories increases then in that case due to our considerable spending on these categories we have to cut our expenses on other categories to keep our consumption in these categories at current level or might have to decrease our consumption with respect to these categories.
Thus, it should be noted that any change in categories on which a consumer spends larger percentage of his income typically impacts the overall budget of that consumer.
Government assigns weight to these categories after careful observation of the spending habits of the people. Government assigns weight-age not by institution but on the basis of market research and scientific observation.
For example, Food, housing, and transportation indeed account for around 70-75 percent of household budget. Government has also assigned weight-age to these categories on similar lines.
Hence, in our view, the government’s weightings are an accurate approximation for the whole economy.
Category
CPI Weight
Our Budget
Food and Beverages
14.8
15
Housing
41.5
40
Apparel
3.6
3.2
Transportation
17.3
16.9
Medical Care
6.6
6.8
Recreation
6.3
6.5
Education and Communication
6.4
6.9
Other
3.5
3.7
Total
100
100
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