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Class Notes - 9-28-07

# Class Notes - 9-28-07 - Macroeconomics Class Notes EXAMPLE...

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Macroeconomics – Class Notes – 9/28/07 EXAMPLE OF CPI CALCULATION : Step #1: Establish Market Basket: - Furbies (2 of these) - Trolls (1 of these) Step #2: Find Prices Year Price Furbie Price Troll 1999 10 1 2000 12 2 2001 10 8 Step #3: Compute Cost of Basket Year Price Furbie Price Troll Total between the two types of goods 1999 10 (2) 1 (1) 21 2000 12(2) 2(1) 26 2001 10(2) 8(1) 28 Step #4: Choose Base Year and Compute Index Numbers Year Index Number 1999 (\$21/\$21) * 100 = 100.0 [BASE YEAR] 2000 (\$26/\$21) * 100 = 123.8 2001 (\$28/\$21) * 100 = 133.3 CMB – Consumer Market Basket CPI Index Number (X) = [(CMB) (X) / (CMB ( base year )) ] * 100 o For any given year “X” Step #5: Compute Inflation Rates

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CALCULATING PERCENT CHANGE - % change = [(Final – Initial) / (Initial)] * 100 - [(133.3 – 123.8) / 123.8] * 100 = (9.5 / 123.8) * 100 = 7.7% CLASSIFYING INFLATION Price Index for 3 Years 100 98 96 Deflation 100 101 102 Creeping Inflation 100 120 130 Disinflation 100 200 800 Hyperinflation (50% increase during the year) * CPI is not a perfect measure of “cost of living.” Three problems : - Substitution Bias - Most important weakness o
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