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ECON312N Principles of Economics Week 6 Discussion

ECON312N Principles of Economics Week 6 Discussion

ECON312N Principles of Economics

Week 6 Discussion

Inflation in the Costs of Education and Healthcare

Required Resources

Read/review the following resources for this activity:

Textbook: Chapter 16

Lesson

Link (website): Bureau of Labor Statistics (Links to an external site.)

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. First, the Cost of the CPI market basket is calculated at base-year prices. Second, the cost of the CPI market basket is calculated at current-period prices. Finally, 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 Healthcare 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.

Graph showing the changes in medical care, education, and all items minus food and energy

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, address the following:

In your opinion, what are the implications of the high cost of Healthcare and 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?

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