Lectures_Outline_Chpt2

# T pt pt 1 pt 1 if positive inflation if negative

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Unformatted text preview: in which the economy’s aggregate price level is increasing. • πt = (Pt – Pt-1)/ Pt-1 – if positive, inflation – if negative, deflation The Inflation Rate • How do we measure aggregate price level? – GDP deflator: measures the average price of the goods produced in an economy. Pt = \$ Yt / Yt The Inflation Rate • How do we measure price level? – Consumer Price Index (CPI): measures the average price of goods households consume. • Find out the representative consumption basket of a typical urban . • Calculate the cost of the basket every year. • Choose a base year and set CPI to be 100 • Use the increase in the cost of basket from the base year to calculate CPI in a given year. EXAMPLE basket: {4 pizzas, 10 lattes} year price of pizza price of latte 2003 \$10 \$2.00 \$10 x 4 + \$2 x 10 = \$60 2004 \$11 \$2.50 \$11 x 4 + \$2.5 x 10 = \$69 2005 \$12 \$3.00 \$12 x 4 + \$3 x 10 = \$78 cost of basket Compute CPI in each year: 2003: 100 x (\$60/\$60) = 100 2004: 100 x (\$69/\$60) = 115 2005: 100 x (\$78/\$60) = 130 Inflation rate: 15% 13% The Inflation Rate • Key Differences between G...
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## This note was uploaded on 02/06/2014 for the course ECON 110A taught by Professor Staff during the Spring '08 term at UCSD.

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