3 measure of inflation.docx

# 3 measure of inflation.docx - Measures of inflation 1 The...

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Measures of inflation The CPI only includes final consumer goods and includes imports of such goods and services. The national accounts measures also include only final goods, but this is both final consumer goods and capital goods . But only those goods produced domestically. The PPI only includes intermediate goods , but some of these will in fact be capital goods and does include imports. There are no consumer goods included. The consumer price index CPI Is tended to be a measure of inflation not the cost of living 8000 goods and services 11 individual groups 33 sub-groups 87 smaller expenditure classes CPI Index number= costof consumption basket of goods services current year costof consumption basket of goods services the base year Rate of inflation= Rate of inflation current year rateof inflation last year rateof inflation last year The base-year CPI is always equal to 1.00 The CPI for a given period measures the cost of living in that period relative to that in the base year. Deflating The CPI can be used to convert real quantities into current-dollar terms Real income= nominal income CPI ( rateof inflation ) Increasing a nominal quantity according to changes in a price index to prevent inflation from eroding purchasing power is called indexing . An employment contract provides for a first-year wage of \$12.00 per hour and specifies that the real wage will rise by 2 per cent in the second year of the contract and by another 2 per cent in the third year. The CPI is 1.00 in the first year, 1.05 in the second year and 1.10 in the third year.

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