Examples of market basket in the following topics:
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- 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.
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- 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.
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- 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.
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- 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.
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- An exchange rate regime is how a nation manages its currency in the foreign exchange market.
- In a fixed exchange-rate system, a country's government decides the worth of its currency in terms of either a fixed weight of an asset, another currency, or a basket of other currencies.
- These countries can either choose a single currency to peg to, or a "basket" consisting of the currencies of the country's major trading partners.
- Crawling bands: The market value of a national currency is permitted to fluctuate within a range specified by a band of fluctuation.
- The system is designed to peg at a certain value but, at the same time, to "glide" in response to external market uncertainties.
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- A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
- Typically a government maintains a fixed exchange rate by either buying or selling its own currency on the open market.
- If the exchange rate drifts too far below the desired rate, the government buys its own currency in the market using its reserves.
- This places greater demand on the market and pushes up the price of the currency.
- This method is rarely used because it is difficult to enforce and often leads to a black market in foreign currency.
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- The risks that are inherent to a specific investment can be compensated for by a market-assessed risk premium, whereby market participants adjust the price of an asset, impacting its overall return, based on the risk characteristics of the asset.
- Diversification strategies can be as simple as not "placing all your eggs in one basket. " It can also be as complex as a routine evaluation of investment correlation and risk, and dynamic rebalancing of investment holdings.
- Systematic risk arises from market structure or dynamics which produce shocks or uncertainty faced by all agents in the market.
- For example, government policy, international economic forces, or acts of nature can shock the entire market.
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- In order to calculate a price index, one must specify a base period and a basket of goods.
- Suppose that in 1960, the cost of the basket has increased 15%.
- The basket of goods determines which prices are being compared.
- The basket of goods should reflect these proportions.
- The most commonly used formula is a form of the Laspeyres price index, which determines a basket of goods during a base period, finds the price of this basket, and then compares that to the price of the same basket of goods in a later period of time.
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- The basic premise behind this curve is that the varying income levels (as illustrated by the green income line curving upwards) will determine different quantities and balanced baskets along the provided indifference curves for the two goods being compared in this graph.
- In merging Consumer Theory and consumer choices with income level, the primary takeaway is that an increase in income will increase the prospective utility that consumer can acquire in the market.
- Simply put, increases or decreases in income will alter the optimal quantity (and thus relative utility) of a given basket of goods for a specific consumer.
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- A critical input to understanding consumer purchasing behaviors and the general demand present in a given market or economy for specific goods and services is the identification of consumer preferences.
- Consumer preference varies substantially from individual to individual and market to market, requiring comprehensive economic observation of consumer choices and behaviors.
- This could synonymous to saying baskets of goods that provide the same utility.