COURSE

ECON312N: Principles of Economics

Introduction
The Consumer Price Index (CPI) is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. There are three steps in calculating the CPI.

1. The cost of the CPI market basket is calculated at base year prices.
2. The cost of the CPI market basket is calculated at current period prices.
3. The CPI is calculated for the base period and the current period.

The CPI is used to calculate changes in the cost of living and changes in the value of money. To measure these changes, we calculate the inflation rate, which is the percentage change in the price level from one year to the other. Due to the volatility in the prices of certain goods and services, the CPI basket (that includes all items that Americans spend most of their incomes on) might not be a reliable measure of inflationary and deflationary periods. To get a more accurate measure of CPI, therefore, food and energy items are removed from the basket to get Core CPI (Consumer Price Index for All Urban Consumers: All Items Less Food & Energy [CPILFESL]). This measure of the cost of living is often used as a benchmark for changes in the cost of other goods and services.

Two key components of CPI are the costs of education and healthcare. These two variables constitute what is known in economics as human capital, which is a key determinant in the productivity of labor, and hence, essential for economic growth and development. In the last few decades, the value of these variables has risen faster than the value of the general level of prices (CPI), which they are subsets of. According to David Wiczer (2017), “the price of medical care has grown at an average annual rate of 5.3% while the entire basket (headline CPI) has grown at an average annual rate of 3.5%.” He goes on to state that “In the past 20 years, in the regime of stable inflation, headline CPI has grown at an average annual rate of 2.2%, whereas the price level of medical care has grown at an average annual rate of 3.6% – about 70% faster” (para. 1).

As shown in Figure 1, the increases in the costs associated with Health and Education have consistently exceeded the overall cost of living during the period of observation (2000-2018). There are many consequences for the high cost of healthcare and education, not least of which are skipping expensive but necessary medical procedures, discouragement from pursuing career enhancing educational requirements, or resorting to educational loans with the potential for life-long financial consequences.

Figure 1: Increases in the Overall Cost of Living (CPI) Vs. Increases in the Costs of Healthcare and Education.

Initial Post Instructions
For the initial post, you will focus on health or education. Address the following, providing specific examples within the area of focus, perhaps what you have seen in your own communities as well as research:

• What are the implications (including tradeoffs and effects) of the high cost of either health or education on the human capital needs of the U.S. economy?
• What policies would you recommend to rein in these costs or at least to slow down their rate of increase?

SOLUTION

Professor and class,

Higher costs of healthcare are leaving families with a little more money each month than it did in 2009 (Auerbach & Kellermann, 2011). A typical US family was left with only $95 more in 2009, than they were left with in 1999. Implications of high-cost health leads to wasteful spending and an unequal society (Cutler, 2018). Cutler (2018) reported “Estimates suggest between one-quarter and one-half of medical spending is not associated with improved health, although this ………..please click the icon below to access entire solution at $5