# Lecture 4 - Economics 102 Lecture 4 Measuring Prices...

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1 Economics 102 Lecture 4 : Measuring Prices LECTURE 4 MEASURING PRICES 1 Measuring Prices § In 1914, Henry Ford announced he would pay a wage of \$5.00 per 8-hour workday (\$0.625 per hour). [This was more that twice the \$.30 per hour other auto makers were paying.] What wage rate would that compare to today? § In March 1961, the price of a gallon of gasoline reached \$1.66. How does that compare with the price of gasoline today? LECTURE 4 MEASURING PRICES 2 In this lecture, look for answers to these questions: § What is the Consumer Price Index (CPI)? How is it calculated? What is 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? § How can we adjust interest rates for inflation?

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2 LECTURE 4 MEASURING PRICES 3 What is a Price Index? § A measure of the average level of prices § Measures the average cost of a collection (“basket”) of goods and services at a point in time relative to the cost of the same collection in a base year. § We measure the rate of inflation as the percentage change in a price index. § Examples: GDP Deflator, Consumer Price Index (CPI) LECTURE 4 MEASURING PRICES 4 The Consumer Price Index (CPI) § A price index that measures the average level of the prices of goods and services consumed by a typical urban family of four. § The basis of cost of living adjustments (COLAs) in many contracts and in Social Security. LECTURE 4 MEASURING PRICES 5 How the CPI Is Calculated 1. Fix the “basket.” The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” 2. Find the prices.
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## This note was uploaded on 04/02/2008 for the course ECON 102 taught by Professor Rossana during the Fall '08 term at University of Michigan.

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Lecture 4 - Economics 102 Lecture 4 Measuring Prices...

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