Module 2 - MODULE 2 IN 6/1 5/2 03 F N O I T LA PREPARED BY...

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MODULE 2 INF LATION 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 1
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WHAT IS INFLATION? The price level is the average level of prices measured by a price index . The inflation rate is the percentage change in the price level from one year to the next. 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 2
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WHAT IS INFLATION? Inflation is a rise in the general price level , over a period of time. The annual inflation rate is the percentage change in prices over a twelve month period. Inflation is measured by the Consumer Price Index ( CPI ). This is the price of a basket of the normal goods and services people buy. It may also be measured by the GDP Deflator 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 3
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GDP DEFLATOR GDP Deflator = {Nominal GDP/Real GDP} X 100% 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 4
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HOW IS THE CPI MEASURED? The consumer price index( CPI ) is a price index based on expenditure of a typical metropolitan family . It included prices on more than 100 goods and services , including: HOUSING TRANSPORT FOOD MEDICAL EXPENSES ENTERTAINMENT 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 5
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CONSUMER PRICE INDEX ( CPI ) Consumer Price Index ( CPI ). This is the price of a basket of the normal goods and services people buy. 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 6
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HOW IS THE CPI MEASURED? The price of each item is weighted by the proportion of the representative family’s expenditure on this item . The more of the family’s income spent on an item the bigger the weight and the larger the effect that item has on the CPI. For example a 10% rise in the cost of petrol has a bigger impact than a 10% increase in the price of a box of toothpicks. 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 7
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WHAT IS THE ANNUAL INFLATION RATE? The annual inflation rate is the % change in the price indices between 2 years . 2nd year - 1st year X 100 1st year eg. 1st year CPI -200 2nd year CPI - 210 is 210-200 X 100 = 5% 200 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 8
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CALCULATION OF CPI Base year Current year Items in a basket Price ($) Expenditure Price ($) Expenditure 5 kg of oranges 0.80 /kg 4 1.2/kg 6 6 haircuts 11.00ea ch 66 12.50each 75 200 bus rides 0.70 each 140 0.75 150 Total exp 210 231 03/ 25/16 PREPARED BY MS.FARHA ZEBA IBRAHIM 9
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CPI
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