Lecture 3 Handout Inflation Measurement

Lecture 3 Handout Inflation Measurement - ECO 320L Handout:...

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1/2 ECO 320L Handout: Inflation Measurement 3/23/2009 Professor Beatrix Paal BRB 3.114 paal@mail.utexas.edu (512) 475-8531 Inflation is the rate of increase in the general price level. Specific ways of measuring the general price level: 1. GDP deflator 2. CPI: consumer price index (3. PPI: producer price index) Each of these measures is an “index” as we discussed in lecture 1. Inflation is the growth rate of this index. We construct the price indices the following way: GDP deflator 1. pick a base year, say year 0. set GDP deflator 0 = 1. (Sometimes 100 is used) 2. calculate real GDP for each year t = 1, 2, 3, 4… How? Calculate GDP using base year prices. 3. the growth factor in prices between year 1 and year t can be measured as: 0, nominal real t t t GDP G GDP = 4. Calculate GDP deflator as 00 , 0 nominal nominal deflator deflator deflator 1 real real tt GDP GDP GDP GDP G GDP GDP GDP =⋅ = CPI 1. pick a base year, say year 0. set CPI 0 = 100. 2. Calculate the cost of consumption basket in base year. (Basket is all of consumption) 3.
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Lecture 3 Handout Inflation Measurement - ECO 320L Handout:...

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