7(22)C H A P T E RGDP and the CPI: Tracking the Macroeconomy
Back to Table of contentsMeasuring PricesJust as macroeconomists find it useful to have a single number representing the overall level of output in a given year (GDP), they also find it useful to have a single number representing the overall level of prices: the aggregate price level. Aggregate price level: a single number summarizing what was happening to consumer prices. A measure of the overall level of prices in the economy. •How can we summarize the prices of all these goods and services with a single number? Price Index
Back to Table of contentsPRICE INDEXESPrice index in = Cost of market basket in a given yearx 100a given year Cost of market basket in base yearPrice Index: the cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base yearYou should note that the price index for the base year always results in a price index equal to 100. This is because the price index in the base year is equal to: (cost of market basket in base year/cost of market basket in base year) × 100 = 100.
Back to Table of contentsPRICE INDEXES AND THE AGGREGATE PRICE LEVELTo measure the aggregate price level, economists calculate the cost of purchasing a market basket. Market basket: a hypothetical set of consumer purchases of goods and services. Economists track the typical basket of goods and services purchased before the price changes.
Back to Table of contentsLet’s Look at 2 Price Indexes1.Consumer Price Index (CPI)2.Personal Consumption Expenditure (PCE)
Back to Table of contentsTwo Common Measure of Inflation are IndexesThere are two common measures of inflation in the US today: 1.the Consumer Price Index(CPI) released by the Bureau of Labor Statistics, and 2.