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Week%204%20Lecture%20-%20HO

# Week%204%20Lecture%20-%20HO - Price Indices How do...

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Price Indices How do economists measure the average level of prices? We need this measure before we can measure the rate of inflation in our economy, or rise in the ‘cost of living.” Our measure is a price index. To construct a price index:

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The GDP Deflator We have already calculated a price index this semester, the GDP Deflator.
Measuring Inflation With a Price Index If we have calculated a price index for Year 1, PI Year 1 , and price index for year 2, PI Year 2 , the rate of inflation between these two periods equals: For example, if PI Year 2 = 110.3 and PI Year 1 = 102.6, the average level of prices rose by: % P % P

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A Price Index Problem: Joe College’s Diet Joe College is a simple man. He lives on a diet which consists of nothing other than pizza and beer. His monthly consumption during his first and second years of college are shown below. Beer Pizza Quantity (Glasses) Price (\$/Glass) Quantity (Slices) Price (\$/Slice) Year 1 40 1.00 80 1.75 Year 2 50 1.10 50 2.50
Joe chooses as his basket of goods the quantities of Beer and Pizza he consumed each month in Year 1. He also chooses Year 1 as his base year: PI Year 1 = × 100 = PI Year 2 = × 100 = Beer Pizza Quantity (Glasses) Price (\$/Glass) Quantity (Slices) Price (\$/Slice) Year 1 40 1.00 80 1.75 Year 2 50 1.10 50 2.50 Joe College’s Price Index

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Cost of Living Raise for Joe?
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