Econ Oct 6 - XPI VS GDP deflator 1. CPI- goods and services...

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should i spend my money now or save for a rainy day? Using CPI: Example: your father eared $40,000 in 1972. What is this salary worth in 2008 dollars? CPI 1972= 41.8 CPI 2008= 132.3 Answer: 132.3/41.8 = X/ $40,000 X= 132.3x $ 40,000 / 41.8 = $126,60287 Problem with CPI * There are 3 problems with CPI 1. Substitution biss - ignores consumer substitution; overstates inflation 2. Introduvtion of new goods- CPI is based on a fix basked of goods and services; overstates inflation. 3. Unmeasured quality change- some price changes reflect quality improvements; overstates inflation.
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Unformatted text preview: XPI VS GDP deflator 1. CPI- goods and services bought by typical consumers. GDP deflator - reflects prices of all goods and services produced domestically 2. CPI - prices changes, quantities stay fixed GDP deflator - quantity change, price stay fixed Nominal interest rates: interest rate without correction for inflation- measures the increase in the number of dollars in your bank account. Real interest rate: interested rate with correction for onflation- measures the increase in the purchasing power of the dollars in your saving account Real interste rate . ....
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