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CPI Notes - Economics Indicators Consumer Price Index...

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Economics Indicators: Consumer Price Index Reminder of Economic Goals: Economic Growth, Low U, and Price Stability Unemployment Inflation GDP Growth Good 6% or less 1% - 4% 2.5% - 5% Worry 6.5% - 8% 5% - 8% 1% - 2% Bad 6.5% - 8% 5% - 8% .5% or less Current 7.6% 4% -3% Define: Deflation: declines in the PL Hyperinflation: out of control inflation Inflation: overall increase in the price level; general level of the prices increasing; NOT all individual prices Measurement of inflation: use a price index: measures the general level of prices in any year relative to prices in the base year = CPI Candy Activity - handout Calculations: CPI = P of Market Basket x 100 or Inflation Rate = later yr earlier yr/ base yr x 100 P of index Market Basket earlier yr Problems with CPI Overstated by 1.3% Substitution of cheaper goods: Doesn’t take into consideration consumer’s abilities to substitute cheaper goods Goods evolve-Doesn’t take into consideration the introduction of new goods- Quality differences: Doesn’t take into consideration difference in the quality of goods Fictitious urban consumer Understated Housing makes up @41% and rising home prices are not counted; but rent equivalent is Healthcare accounts for 15% of GDP but only 5.8% in the CPI market basket Utilizes pricing that actually reduces the value of goods if there is an improvement Compared to the GDP Deflator GDP reflects p of all goods produced domestically vs. CPI is the p of all goods bought by consumers GDP def compares p of goods currently in production to goods produced in the base year Market Basket Activity: CPI vs. GDP Deflator 1. Calculate the CPI: 248.05
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