Teresa Gamba 10/29/15 Module 15 Outline & HW The Measurement and Calculation of Inflation Price Indexes and the Aggregate Price Level Aggregate price level is a measure of the overall level of prices in the economy Market Baskets and Price Indexes To measure the average price changes for consumer goods and services, economists track changes in the cost of a typical consumer’s consumption bundle- the typical basket of goods and services purchased before the price changes Market basket is a hypothetical consumption bundle used to measure changes in the overall price level (frost destroyed most of the citrus harvest) Pre-frost (acts as base year) Post-frost Price of orange $.20 $.40 Price of grapefruit $.60 $1.00 Price of lemon $.25 $.45 Cost of market basket (200 oranges, 50 grapefruit, 100 lemons) (200 x $.20) + (50 x $.60) + (100 x $.25) = $95.00 (200 x $.40) + (50 x $1.00) + (100 x $.45) = $175.00 Before the frost, it cost $95; after the frost, the same basket of goods cost $175. Since $175/$95= 1.842, the post-frost basket costs 1.842 times the cost of the pre-frost basket, a cost increase of 84.2%. Economists use the same method to measure changes in the overall price level Price index - a measure of the overall price level; measures the cost of purchasing a given market basket in a given year. The index value is normalized so that it is equal to 100 in the selected base year. (aka price index will equal 100 in base year) Price index in a given yr= Cost of market basket in a given year x100
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- Fall '15
- Inflation, AP MACRO, Krugman, Consumer price index, Market Basket