Principles of Macroeconomics – Measuring Inflation and Unemployment (Lecture 2.2)

Principles of Macroeconomics – Measuring Inflation and Unemployment (Lecture 2.2)

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Principles of Macroeconomics – Measuring Inflation and Unemployment (Lecture 2.2) Two different measures of inflation: CPI (Consumer Price Index) o Measures the average level of the prices of goods and services consumed by an urban family. o Most commonly used as it is fast to calculate, but can be misleading. o CPI = ∑ P 1 X Q 0 X 100 P 0 X Q 0 o Converting into an index number with the base pyramid price gives a price of 100 (no units). Deflator o Most preferred by economist, but very time consuming, thus is not commonly used. o Deflator = ∑ P 1 X Q 1 X 100 P 0 X Q 1 Core inflation vs Headline inflation o Core inflation is what the ABS, RBA and government use for MP. Biased CPI New Goods Bias, as new goods that were not available in the base year appear, and if they are more expensive than the goods they replace, they put an upwards bias into the CPI. Quality Changes Bias, as the quality improvements occur every year, part of the rise in the price is payment for improved quality and is not inflation. This makes the CPI
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This note was uploaded on 09/27/2011 for the course FINANCE 1001 taught by Professor Profassorted during the Three '11 term at University of Adelaide.

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Principles of Macroeconomics – Measuring Inflation and Unemployment (Lecture 2.2)

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