market basket

Examples of market basket in the following topics:

• Real Versus Nominal Rates

  • It is the ratio of the number of units of a given country's currency necessary to buy a market basket of goods in the other country, after acquiring the other country's currency in the foreign exchange market, to the number of units of the given country's currency that would be necessary to buy that market basket directly in the given country.
  • Using the PPP rate for hypothetical currency conversions, a given amount of one currency has the same purchasing power whether used directly to purchase a market basket of goods or used to convert at the PPP rate to the other currency and then purchase the market basket using that currency.
  • On the open market, 2 A's can buy one B.
  • The real exchange rate is the nominal exchange rate times the relative prices of a market basket of goods in the two countries.
  • So, in this example, say it take 10 A's to buy a specific basket of goods and 15 Bs to buy that same basket.

• Defining and Calculating CPI

  • It measures changes in the price level of a market basket of goods and services used by households.
  • $\text{CPI for multiple items} = \frac{\text{Cost of CPI market basket at current period prices}}{\text{Cost of CPI market basket at base period prices}} \times 100.$
  • Market basket at base period prices = 5(6.00) + 2(4.00) + 2(35.00) = 108.00.
  • Market basket at current period prices = 5(7.00) + 2(6.00) + 2(45.00) = 137.00.
  • The GDP deflator differs from the CPI because it is not based on a fixed basket of goods and services.

• Measuring Inflation

  • The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index (CPI) The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer".
  • The index for another year (say, year 1) is calculated by $CPI_{year 1}=({Basket Cost}_{year 1}/{Basket Cost}_{base year}) * 100$
  • For example, assume you spend your money on bread, jeans, DVDs, and gasoline, and you'd like to measure the inflation that you experience with this basket of goods.
  • The price of the basket of goods in the base period is the total money spent on this quantity of items at the base period prices; in this case, this equals $207.
  • Using the quantities from the base period, the total cost of the market basket in the current period is $212.

• Concentrated Targeting

  • The target market for CVS Caremark is women since they make up 80% of the pharmacy chain's customers.
  • CVS has marketed its stores to aid women who are constantly multitasking.
  • An organization that adopts a concentration strategy chooses to focus its marketing efforts on only one very defined and specific market segment.
  • Accordingly, only one marketing mix is developed.
  • Since the company has focused all their efforts on one market (essentially putting all their eggs in one basket), the firm is at risk for failing.

• Portfolio Risk

  • The index is a a fruit basket.
  • A full fruit basket probably has 10 or 15 different fruits, but my bowl will be efficient as much as its statistical parameters (risk and return) mimic those of the whole basket.
  • In addition, we can extend the implications made by the security market line theory from individual assets to portfolios.
  • How does my bowl of fruit compare to the whole basket and how does that compare to other bowls out there?
  • To calculate the risk in my bowl, we need a little more background information on fruit markets.

• Impact of Diversification on Risk and Return: Unsystematic Risk

  • Did your grandmother ever warn you not to put all your eggs in one basket?
  • If you put all your eggs in one basket, and that basket breaks, you are stuck with nothing to fry up into an omelet.
  • If you are managing a pool of assets, you want to get positive returns without being in danger of "losing your shirt. " The probability that one stock goes belly up is much higher than that the whole stock market does.
  • Proponents of passive management say the market knows best, and they seek a portfolio that has an underlying pool that mimics a benchmark index (think S&P 500).
  • They might decide Microsoft's stock is underpriced based on changing demographics to the labor supply in Seattle, or they might decide that political stability has improved emerging markets in Sub-Saharan Africa but the yield on their bonds hasn't taken that into account.

• Purchasing Power Parity (PPP) Theory

  • Traders would buy products from the low-price market and sell products to the expensive market.
  • Consequently, prices would converge to one price across all markets as traders shifted supply from the low-price market to the high-price market.
  • Then economists can compare a basket of goods of one country to another country.
  • Consumer Price Index (CPI) is a measure of a basket of goods in the United States.
  • PPP will not hold if governments define different baskets for their CPIs.

• The GDP Deflator

  • Nominal GDP, or unadjusted GDP, is the market value of all final goods produced in a geographical region, usually a country.
  • That market value depends on the quantities of goods and services produced and their respective prices.
  • Unlike the CPI, the GDP deflator is not based on a fixed basket of goods and services; the "basket" for the GDP deflator is allowed to change from year to year with people's consumption and investment patterns.

• Purchase Process

  • Brokers also can furnish considerable market information regarding prices, products, and market conditions.
  • An individual can also purchase bonds by investing in bond funds, which hold baskets of bonds rather than competing for individual bond sales.
  • Bond funds typically pay higher dividends than certificates of deposits (CDs) and money market accounts.

• Rare Events

  • They hurry to be first in line to grab a prize from a tall basket that they cannot see inside because they will be blindfolded.
  • There are 200 plastic bubbles in the basket and Didi and Ali have been told that there is only one with a $100 bill.
  • Didi is the first person to reach into the basket and pull out a bubble.
  • Because this is so unlikely, Ali is hoping that what the two of them were told is wrong and there are more $100 bills in the basket.
  • A "rare event" has occurred (Didi getting the $100 bill) so Ali doubts the assumption about only one $100 bill being in the basket.