ch6.pptx - Chapter 5 Review Expenditure approach for...

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Chapter 5 Review Expenditure approach for calculating GDP GDP = C + I + G + NX Income approach for calculating GDP Produces the same result as the expenditure approach does Complicated Extended reading: see handout “Income Approach.pdf” 1
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* The Income Approach to GDP 2 Disposable income = consumption (C) + savings (S) * Contents with an asteroid will not be included in your exams
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Premium PowerPoint Slides by: V. Andreea CHIRITESCU Eastern Illinois University N. GREGORY MANKIW BRIEF PRINCIPLES OF MACROECONOMICS Eight Edition Measuring the Cost of Living 3 CHAPTE R 6
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Look for the answers to these questions: What is the Consumer Price Index (CPI)? How is it calculated? What’s it used for? What are the problems with the CPI? How serious are they? How does the CPI differ from the GDP deflator? How can we use the CPI to compare dollar amounts from different years? Why would we want to do this, anyway? How can we correct interest rates for inflation? 4
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How Do Prices Change Over Time 5 All items All items less food and energy Apparel Butter Source:
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The Consumer Price Index Consumer price index (CPI) Measure of the overall level of prices Measure of the overall cost of goods and services Bought by a typical consumer Computed and reported every month by the Bureau of Labor Statistics 6
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How to Find Price Data All Urban Consumers (Current Series) – Multi-screen data Seasonally adjusted – next US city average – next current – next Select item – next Monthly – next Retrieve data Check the box “include graphs” Change the beginning year to the earliest year available Retrieve Data Right-click graph Save image as 7
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How to Find Price Data Assignment Find price data on college tuition and on bread Download the graphs Note: The current standard reference base period is 1982-84 =100. That is, all price changes are measured from a base (100) that represents the average index level of the 36-month period encompassing 1982, 1983, and 1984. 8
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Calculating CPI 1. Fix the basket The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” More weight given for important goods and services Example: assume 2 goods in a typical consumer’s basket 9
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EXAMPLE: basket: {4 pizzas, 10 lattes} $12 x 4 + $3 x 10 = $78 $11 x 4 + $2.5 x 10 = $69 $10 x 4 + $2 x 10 = $60 cost of basket $3.00 $2.50 $2.00 price of latte $12 2016 $11 2015 $10 2014 price of pizza year
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Calculating CPI 2. Find the prices The BLS collects data on the prices of all the goods in the basket. 3. Compute the basket’s cost Use the prices to compute the total cost of the basket 11
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Calculating CPI Choose a base year and compute CPI Compute the inflation rate The percentage change in the price index from the preceding period 12 Price of basket in current year 100 Price of basket in base year CPI CPI in year 2 - CPI in year 1 Inflation 100% CPI in year 1
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Deflation Deflation: Negative inflation Example: Japan 1999-2005; 2009-2012 13 Japan Inflation Rate
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U.S. Inflation Data 14 Source: https:// fred.stlouisfed.org/series/FPCPITOTLZGUSA Data range: 1960 – 2016
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