The Economic Theory

Identification of the relevant context of the blog and the associated assumptions

first article titled “ If you thought the consumer price index
appropriately enumerated the cost of living” presents the idea that
although the official rate of inflation has been registered to be 0.5%
the analytical cost of living reflects that the indexes for different
living expenses exceeded the inflation rate and was registered at 0.7%.
The article delves deep into the concept and the principles that explain
the reason behind the increase in the living cost index above the
inflation rate (Anderson 2014).

consumer price index is primarily measures the price movements and
cannot suitably represent the cost incurred for living (Colander 2013). 
This is so because the price that is already included in the consumer
price index is considered as the margin between what different banks
make payments for money and the charges they take and this might perhaps
not change even when the mortgage rates rise. However, the mortgages
rates are considered to be very relevant for the purpose of enumeration
of the cost of living (Colander 2013). The Bureau of Statistics has
arrived at the decision that although the interest rates are not prices
the rate of interest can be considered as a cost.  As indicated in the
present article, the price of different financial as well as insurance
services increased by more than 2.9% when calculated for different
households having employees during the financial quarter of December and
1.4% for particular household having age pensioners.  Therefore, as per
the case study illustrated in this specific article, it can be hereby
ascertained that the Bureau has introduced an extensive inquiry
regarding the calculation of the consumer price index and asks for
submissions on the relevance and the manner of handling deposits as well
as loans (Hubbard et al. 2013).  

Relevant economic theory Application of the relevant theory to explore the particular economic concepts

rightly put forward by Miller and Benjamin (2012) consumer price index
refers to the changes in the level of prices of a definite market basket
containing different consumer goods as well as services bought by
different households.  Generally, the annual change percentage in the
consumer price index can be regarded as a particular measure of
inflation (Perman and Scouller, 2011).

The consumer price index
can also be utilized to index different aspects that include the real
value of the salaries and wages, pensions among many others for
regulation and control of different prices and for deflating the
monetary magnitudes in order to reflect the changes in real values. 
Miller and Benjamin (2012) opines that the essential data required for
the construction of the CPI essentially include the price data as well
as the weighting data

Insights that is relevant to the professional practice

this particular case, question arises regarding the weighting bias that
is essentially inherent in the process of enumeration of the inflation
by using the consumer price index.  There are methods for assimilation
of different information in different time series in order to generate
the specific index of concurrent economic conditions (Miller and
Benjamin 2012).  Therefore, the dynamic factor model can be used for the
purpose of computation of the general inflation component in a wide
area of the consumer price changes. However, it can be hereby stated
that the CPI as a particular measure of the rate of inflation can be
regarded as the deviation or the digression in the trend. On the
contrary, the CPI as a specific measure of the cost of living can be
defined as the digression in the CPI trend from the constant utility
price index (Miller and Benjamin 2012).

Identification of the relevant context of the blog and the associated assumptions 

present article titled “What Would Keynes Have Done?’ presents a
detailed illustration of the reasons behind the economic downturn faced
by the economy and turns to the concepts of Keynes for analyzing as well
as diagnosing the reasons of recessions as well as depressions that
stays as the foundation of the modern macroeconomics (Kuroki 2013). The
present article mentions that the overall demand for goods as well as
services decreases, different business operations throughout the nation
observes a sharp decline in the sales figure. Accordingly, the low sales
figure also induces the corporations to reduce the manufacturing that
in turn leads to lay off of the workers. The rise in the unemployment as
well as decline in the rate of profitability therefore further
discourages the level of demand directing the feedback cycle (Kuroki
2013). Again, the overall state of affairs reverses, as stated in the
Keynesian theory but only at time when certain events or else the policy
boosts the aggregate demand. The output of different goods as well as
services in an economy can be categorized into for different components
that include consumption, investment, net exports as well as government

Relevant economic theory Application of the relevant theory to explore the particular economic concepts

the Keynesian theory, “Paradox of Thrift” suggests that at the time
when the households make attempts to save more, the increase in saving
leads to decrease in the aggregate demand in the short run and thereby
overall decrease in the national income (Kuroki 2013).  Again, the
decreased income can in turn prevent households from attainment of the
target of savings.

Figure 1: paradox of thrift

Source: (Kuroki 2013)

Insights that is relevant to the professional practice

per the article, it can be ascertained that the consumer confidence has
been recorded to be very low from the perspective of consumption.
Therefore, a bit of saving can help in boosting the consumer confidence
and promote the increase in the sales figure. However, the at the time
of recession, it is not considered as the best period for the households
to save  as proposed in the Keynesian concept of Paradox of thrift (Colander 2013).
Again, as per the case study, it can be hereby ascertained that the
fall in the overall consumption in the economy can be dealt with rise in
investment. The investment decisions is difficult when the share bourse
is unfavorable, interest rates on bonds are high and entire banking
system lies at the teetering edge. In addition to this, the net exports
depend on the price of the foreign and the domestic goods (Hubbard et al.  2013).
However, during the period of recession, the fast moving worldwide
capital looks for the protected retreat. The dollar appreciated by
approximately 19% that put a fold in the export boom (Hubbard et al. 2013).
Finally the government purchases refers to the governing authority  as
the demander of the last resort and fit appropriately in principles
proposed by the theory proposed by Keynesian. This theory proposed by
Keynes refers to the fact that increase in the government spending can
lead to increase in the national income and thereby stimulates the
entire consumer spending as well as corporations. However, the Keynesian
economists often ignore the long run distresses at the time when the
economy faces short run issues.


Anderson, D. (2014). Cracking the AP economics macro & micro exams.

Colander, D. (2013). Economics. New York: McGraw-Hill Irwin.

Hubbard, R., O’Brien, A. and Sharma, A. (2013). Economics. Harlow: Pearson Education.

Kuroki, R. (2013). Keynes and modern economics. Abingdon, Oxon: Routledge.

Miller, R. and Benjamin, D. (2012). The economics of macro issues. New York: Addison-Wesley.

Perman, R. and Scouller, J. (2011). Business economics. Oxford: Oxford University Press.

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