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Unformatted text preview: Measuring the Cost of Living Slide #03 June 30 Intro Macro 1 The GDP deflator • Measure of the price level • Ratio of nominal GDP to real GDP times 100 • =100 for the base year • Measures the current level of prices relative to the level of prices in the base year • Inflation – Economy’s overall price level is rising Intro Macro 2 100 1 year in deflator GDP 1 year in deflator GDP 2 year in deflator GDP 2 year in rate Inflation The Consumer Price Index • Consumer price index (CPI) – Measure of the overall cost of goods & services – Bought by a typical consumer • How the consumer price index is calculated 1.Fix the basket 2.Find the prices 3. Compute the basket’s cost Intro Macro 3 Intro Macro 4 The typical basket of goods and services 1 5 This figure shows how the typical consumer divides spending among various categories of goods and services. The Bureau of Labor Statistics calls each percentage the ―relative importance‖ of the category. 6 Calculating the CPI and the inflation rate: an example 1 7 Step 1: Survey consumers to determine a fixed basket of goods Basket = 4 hot dogs, 2 hamburgers Step 2: Find the price of each good in each year Year Price of hot dogs Price of hamburgers 2008 2009 2010 $1 2 3 $2 3 4 Step 3: Compute the cost of the basket of goods in each year 2008 2009 2010 ($1 per hot dog × 4 hot dogs) + ($2 per hamburger × 2 hamburgers) = $8 per basket ($2 per hot dog × 4 hot dogs) + ($3 per hamburger × 2 hamburgers) = $14 per basket ($3 per hot dog × 4 hot dogs) + ($4 per hamburger × 2 hamburgers) = $20 per basket Step 4: Choose one year as a base year (2008) and compute the CPI in each year 2008 2009 2010 ($8 / $8) × 100 = 100 ($14 / $8) × 100 = 175 ($20 / $8) × 100 = 250 Step 5: Use the consumer price index to compute the inflation rate from previous year 2009 2010 (175 – 100) / 100 × 100 = 75% (250 – 175) / 175 × 100 = 43% The Consumer Price Index • How the consumer price index is calculated 4. Chose a base year and compute the CPI • Price of basket of goods & services in current year • Divided by price of basket in base year • Times 100 5. Compute the inflation rate • Percentage change in the price index from the preceding period Intro Macro 8 100 1 year in CPI 1 year in CPI 2 year in CPI 2 year in rate Inflation 9 Step 1: Survey consumers to determine a fixed basket of goods...
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This document was uploaded on 10/28/2011 for the course 220 103 at Rutgers.
 Summer '09
 sheflin

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