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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 Economys 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 baskets 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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 Summer '09
 sheflin

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