ECON
Price Level of Inflation Notes

Price Level of Inflation Notes - Chapter 7 Notes The Price...

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Chapter 7 Notes The Price Level of Inflation Prices: Microeconomics vs Macroeconomics - micro deals w/ relative prices - macro deals w/ absolute prices (money prices) - micro deals primarily with prices of individual goods Price level: average level of prices in the economy Absolute Prices Do Not Move in Lockstep - relative prices change - increases in particular relative prices not considered to be inflation - how do we measure avg. price changes? - using index numbers Measuring the Price Level and Inflation - economists use different measures of price level, depending on purpose. But ALL are calculated and reported as index numbers Index Numbers in General - most measures of the price level reported in the form of an index - index- series of numbers, each representing a different period, used to track a variable’s rise or fall over time - index #s meaningful only in relative sense: we compare one period’s index with that of another period - in general, index number calculated as... value of measure in current period x 100 value of measure in base period
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The Consumer Price Index - most widely used measure of price level in U.S. is Consumer Price Index (CPI) - an index of the cost, through time, of a market basket of goods purchased by a typical household - Bureau of Labor Statistics reports CPI - BLS must decide which items to include, what weight to give each item CPI for a Two-Good Economy - 2 goods: A and B - price of A is Pa. Price of B is Pb - quantity purchased of A is Qa. Quantity purchased of B is Qb - base period denoted with subscript of b - current period denoted with subscript of t Which Items to Include? - goal of CPI is to track prices paid by consumers - includes part of GDP that consumers purchase as final users - also includes... - household purchases of used goods such as used cars or used computers - household purchases of imports from other countries - CPI does not include goods/ services purchased by anyone other than consumers - leaves out purchases by business - leaves out goods/ services purchased by gov’t agencies - leaves out goods/ services purchased by foreigners - asset transactions, like those in stocks, bonds, and real estate The CPI: Construction - computed and published monthly - both unadjusted and seasonally adjusted data published
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How Much Weight for Each Item? -CPI market basket is collection of goods/ services that typical consumer buys if market basket’s cost rises by 10% over some period, then price level reported by CPI increases by 10% - to determine market basket, BLS surveys thousands of families every couple of years, records spending in detail Tracking and Reporting Price Level - about 80,000 price quotes from thousands of stores, gas stations, medical offices, apartments CPI = Cost of market basket in current period x 100 Cost of market basket in July 1983 The CPI: Limitations in Measurement - only 80,000 price quotes taken each month - goods and services in sample not exactly representative of all purchases by EVERYONE - prices sampled not exactly representative of all purchases by EVERYONE
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