Business case

increase in the cost of living has slowed 1955 with the prices today. A cost of loving down recently, but the same isn't tre for the index might be calculated as shown in Table 1.

cost of loving. Raymond F. DeVoe Ie., who The 1998 COL index was 748.

writes a, stock market newsletter, has been cal- Tti~C?~~of lovi-i.ß-il_,!.~J;-Une up m\J_cl~more culating a cost of loving (COL) index since tliaB. ll~..l-LThe ÇQL ass_u-ie~tha.U~o~ 1955. (Please note that t1e COL index is not rnen still court young women the same way the same as COLA, the cost-of-Iiving adjust- t!!~Lc!i-aJ-ij~T9_~~,- T;J;y'S~o~-;tingpractlces ment.) Since that time, the general price level may include fewer candlelight dinners and of consumer goods and services has increased fewer birthday gifts of expensive perfume. The 6.1 ties the level in 1955. In other words if same type of problem affects the CPr. Changes

í955 were the base period, the CPI would h~ve in lifestyles and consumption habits make com- risen from ioa to 610. parisons of the cost of living over a number of

To figure the COL, we take a representa- years diffcult. For this reason, the base period tive sample of goods and services involved in ;. . ....., ..... and the contents of the market basket of goods the mating game and compare their prices)Il~;;;;."':.¡ for the cpr are periodically updated.

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Chapter 11

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Table 1..'. Cost,of Loving Index* Item Number Price in PoxQ Price in P1 x Q

Pm-chased 1955 (Po) 1998 (P1)

(Q)

Botte of wine 4 $1.55 $6.20 $9.95 $39.80 First-run movie 14 1.00 14.00 7.50 105.00 Candlelight diner 6 2.75 16.50 80.00 480.00 Silver bracelet 2 1.29 2.58 26.00 52.00 Dozen roses 2 5.00 10.00 40.00 80.00 Perfme 1 35.00 35.00 95.00 95.00 Diamond ring 1 400.00 400.00 2,750.00 2,750.00 Blood test 1 7.00 7.00 45.00 45.00 Marriage license 1 2.00 2.00 45.00 45.00

$493.28 $3,691.80

COL (1998) = ~ x 100 = $3,691.80 x 100 = 748 Po x Q $493.28

*This index is based on but is not identical to the one devised by Raymond F. DeVoe Jr.

Economic Reasoning

1. One of the most inflationary items in the COL was the candlelight dinnee. The price of dining out increased because more women entered the labor force and, with two people working full time, they dined out more frequently. Would you call the inflation of dining out a demand-pull or a cost-push type of inflation? Why?

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(Continued from page 300)

whether it be large or small, because the mon- etary unit itself is arbitrary.

The quantity theory of money made a come- back in the 1980s, and the monetarists had a

large influence on policy. First they noted that T grows over time-it is the growth rate of the economy. They argued that if the economy is at full employment and V is stable, then increasing the money supply annually by the same percent- age as the annual growth rate of T would result in a stable price level over time. Although this works on paper, e~!'1i.sts.ha~e_J.9..nçi-~

problems with it. Ei!st, velocity might not be sta-

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~i~e Stud)' of r~conol1ics

2; Which index is a better measure of our r.

purchasing power, the cpr or the COL? (-t)' ,1( Vt'Why? .' ,)), ~ ;," \\' l(¥ ~ Do you thnk that the high \cost of loving ,. has actually affected dating practices? How? Do price changes affect our buying habits - '¥!'" in general? What implication does this have for the validity of t11e CPP _ . 1_""Li- i,.n",up' ,.1: \II ~"v' Y \ )

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ble, ~.?_t:ere.is no ~~know ~hat(:f!èct ~jn- crease ir-M_Iljg~tti_aY~..i-ix_r-. Sec()!ldL~i~e

financial markets have been deregulated, itjs in- cre~~í~!Y__~lmcult to a~curateiy_~ontroi ~~e

growth rate of the money supply. Third, there hj~~e_e~';J~~k ¿'f co¿;ejp_9Dsl-eil-c.eJi0WUn . changes in the money supplLandPJe rate üti-i--

tlation in-recentyèa:s.As we saw in di-;i1ter-r: re- g~di~~s'h;~ good; theory may look on paper, if it doesn't work in the real world, it must be re- jected. As a consequence, monetarism has been relegated to t1e back seat of economic analysis.