1-18-11

# 1-18-11 - 1/13/2011 Measuring Real Output and Inflation We...

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1/13/2011 1 Measuring Real Output and Inflation We develop a price index to remove inflation from our GDP figures, resulting in real GDP. Then we use the price index to measure inflation. Lecture 3, Tuesday, January 18 “Nominal” vs. “Real” Nominal dollar figures: in “current” prices, not adjusted for inflation Real dollar figures: in “constant” prices, adjusted for inflation Real GDP is “real”ly useful! How to Create a Price Index DeBoer’s Convenience Store Price Index Select a “Market Basket” 20 Stamps 5 gallons gas 2 half-gallons of milk Calculate cost of buying the market basket every month How to Create a Price Index 2005 2010 Price Total Price Total 20 stamps \$0.37 \$ 7.40 \$0.44 \$ 8.80 5 gallons gas \$2.30 \$11.50 \$2.79 \$ 13.95 2 1/2 gal. milk \$1.96 \$ 3.92 \$1.92 \$ 3.84 TOTAL COST \$22.82 \$26.59

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1/13/2011 2 How to Create a Price Index 2005 2010 TOTAL COST \$22.82 \$26.59 Why the difference? Entirely because of price changes . The cost of this market basket measures changes
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## This note was uploaded on 04/25/2011 for the course AGEC 217 taught by Professor Deboer during the Spring '08 term at Purdue.

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1-18-11 - 1/13/2011 Measuring Real Output and Inflation We...

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