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

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

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
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:
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The GDP Deflator We have already calculated a price index this semester, the GDP Deflator.
Background image of page 2
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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 4
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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Cost of Living Raise for Joe? Based upon these price indices, Joe estimates that his cost of living has
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/28/2012 for the course ECON 252 taught by Professor Robertholand during the Spring '08 term at Purdue University-West Lafayette.

Page1 / 21

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

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online