Lecture Notes 6

# Lecture Notes 6 - 1 1 Chapter 6 The Price Level and...

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Unformatted text preview: 1 1 Chapter 6: The Price Level and Inflation 2 Measuring the Price Level and Inflation ¡ Microeconomic causes—changes in individual markets—can explain only a tiny fraction of price change ¢ For the most part, price rises came about because of a continually rising price level ¡ Average level of dollar prices in the economy ¡ 100 years ago one pound of coffee was 15 cents, new suit \$6, private college tuition for 1 year \$200 ¡ When the price level rises, the value of the dollar—its purchasing power– falls ¡ We measure many economic variables—such as income, production, wage rate– in dollars ¢ Over time, how to keep track of them when unit of measurement– the dollar-- is changing? 3 Connection between money and prices ¡ Price= the amount of money required to buy one unit of a good ¡ Value of \$1= how many units of the good does \$1 buy? ¡ Inflation rate= percentage increase in the average level of prices ¡ Prices are defined in terms of money ¢ Need to consider the nature of money 4 Index Numbers in General ¡ Most measures of the price level are reported in the form of an index ¢ Series of numbers, each one representing a different period ¡ are meaningful only in a relative sense ¡ In general, an index number for any measure is calculated as 100 period base in measure of Value period current in measure of Value x • Compress and simplify information so that we can see how things are changing at a glance 2 5 The Consumer Price Index ¡ Consumer Price Index (CPI) is an index of the cost, through time, of a fixed market basket of goods purchased by a typical household in some base period ¡ Most widely used measure of the price level in United States ¢ Designed to track price paid by typical consumer ¢ Compiled and reported by Bureau of Labor Statistics (BLS) ¡ Two problems must be solved before we even begin ¢ Must decide which goods and services should be included in average ¢ What weight to give to each item 100 period base in basket market of Cost period current in basket market of Cost CPI × = 6 The Consumer Price Index ¡ Which items to include? ¢ CPI includes the part of GDP that consumers purchase as final users ¢ Also includes two types of goods and services that consumers buy although they are not part of GDP ¡ HH purchases of used goods ¡ HH purchases of imports from other countries ¡ CPI leaves out purchases by businesses and government agencies ¡ CPI tracks the prices of goods and services only ¢ The prices paid for stocks and bonds are not included ¢ Housing: CPI includes the price of housing services 7 The Consumer Price Index ¡ How much weight to give to each item? ¢ When prices change at different rates, some are rising and some are falling, we need to keep track of the change in average price level ¡ How to combine all the different prices into a average price level?...
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## This note was uploaded on 03/27/2008 for the course ECON 102 taught by Professor Singerman during the Spring '08 term at Iowa State.

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Lecture Notes 6 - 1 1 Chapter 6 The Price Level and...

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