Nominal (money) price or wage – how many dollars it takes to buy something or hire someone Real price or wage – nominal value with inflation explicitly removed The ratio of the value of a market basket of goods & services for the typical household in one month compared to the market basket value in the (arbitrary) base period • 100. It measures the price level for consumers. CPI 8/2017 = 245.0 %Δ CPI = 1.9% – inflation over last year - the “core rate” measures inflation without food & energy prices - regular or “headline” CPI includes food and energy prices inflation : 4% -> 2% CPI: 100 à 104 à 106 this is disinflation – less inflation deflation: CPI declines (100 -> 98) A real price or interest rate removes inflation from a nominal price or interest rate. There is an explicit calculation : subtraction, division, or deflating. Subtraction Method: Δ%real price (or wage) =Δ%nominal price (or wage) - inflation rate Deflating Method The division method, but to base period values. Harm from unanticipated inflation - can reduce real wages - can reduce real interest rates Harm from anticipated inflation - menu costs Section 2 Zero-sum – one person’s (or group’s) gain comes as a loss for another If countries get rich at the expense of others (i.e. growth is zero-sum), then real per capita GDP around the world would be constant over the years Is Economic Growth Zero-Sum? No. Growth is largely “win-win.” Growth over 1 year: ("final - initial" /"initial" ) • 100 Growth over n years: ("final value " /"initial value " )^(("1" /"years between" ) ) " - 1" Rule of 70: an easy-to-use approximation for the # years it take for anything to double in size:
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- Fall '10