ECON202 - Chapter 6 - ECON202 Book Notes Chapter 6 1 The...

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ECON202 Book Notes Chapter 6 1) The Price level and Inflation a) Measuring the price level and inflation i) Index numbers (1) Index (a) A series of numbers used to track a variable’s rise or fall over time (b) value of measure in current positionvalue of measure in base periodx 100 ii) The consumer price index (1) Consumer price index (CPI) (a) An index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period (b) Base period (i) Cost of market basket in July 1983 (2) From price index to inflation rate (a) Inflation rate (i) The percentage change in the price level from one period to the next (b) Deflation (i) A decrease in the price level from one period to the next b) How the CPI is used i) Indexed payment (1) A payment that is periodically adjusted in proportion with a price index ii) Real variables and adjustment for inflation
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ECON202 Book Notes Chapter 6 (1) = real wage in any year nominal wage in that yearCPI that year x 100 iii) Important provisos about wage data (1) When comparing dollar values over time, we care not about the number of dollars, but about their purchasing power. Thus, we translate nominal values into real values using the formula: real value = (nominal value/price index)x100
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