Chapter 17 - Price level and Inflation

# Chapter 17 - Price level and Inflation - Price level and...

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Price level and Inflation – Principles of Economics (Ch. 17) 13/12/10 Consumer Price Index (CPI): For any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year Measure of cost of living during a particular period Price Index: CPI is a price index; a measure of the average price of a given class of goods and services relative to the price of the same goods and services in the base year = CPI Cost of the base-year basket of goods and services in the current year Cost of the base-year basket of goods and services in the base year Inflation: Inflation is a measure of how fast the average price level is changing over time. The CPI provides a measure of the average level of price relative to prices in the base year. Rate of Inflation: the annual percentage rate of change in the price level, as measured, for example by CPI o Computation: Percentage increase in price level (difference between CPIs) divided by the initial price level (base year) Increase in Initial Year CPI price-level price-level Rate of Inflation: 2006 1.25 1.25 (1.3-1.25) 2007 1.3 1.25 0.05 = 0.04 (4%) Harmonised Index of Consumer Prices (HICP): due Maastricht Treaty a comparable measure of inflation in member States of the European Union o Each member produced a national HICP using a common methodology o Monetary Union Index of Consumer Prices (MUICP): a weighted average of nation HICPs in the Eurosystem Deflation: a situation in which the prices of most foods and services are falling over time so that

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