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UNC-Chapel Hill ECON 101 - Measuring Prices and Inflation

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1Econ 101 M. SalemiEcon 101 M. SalemiMeasuring The General Level of Measuring The General Level of Prices and InflationPrices and InflationNews News How Economists Measure the General Level How Economists Measure the General Level of Pricesof PricesWhat is Inflation?What is Inflation?Why is Inflation Costly?Why is Inflation Costly?Midterm Exam StatisticsMidterm Exam StatisticsWhat Have We Learned?What Have We Learned?Inflation in the NewsInflation in the NewsEcon 101 M. SalemiEcon 101 M. SalemiRecitation Assignment for Week 12Recitation Assignment for Week 12Journal AssignmentJournal AssignmentFind an article that concerns a macroeconomics or Find an article that concerns a macroeconomics or monetary policy issue.monetary policy issue.Write 100Write 100--200 words explaining what the issue is and 200 words explaining what the issue is and why it is important.why it is important.Macro Data AssignmentMacro Data AssignmentDownload written assignment and the excel spreadsheet Download written assignment and the excel spreadsheet from the webpage to your laptop.from the webpage to your laptop.Bring both to recitation to begin working on the Bring both to recitation to begin working on the assignment.assignment.Finish the assignment on your own.Finish the assignment on your own.Econ 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiHow Economists Measure the How Economists Measure the General Level of PricesGeneral Level of PricesBabe Ruth earned $80,000 in 1930Babe Ruth earned $80,000 in 1930Barry Bonds earned $15.5 million in 2007Barry Bonds earned $15.5 million in 2007Who was better off?Who was better off?How can we answer the question?How can we answer the question?LetLet’’s put the questions aside for a moment s put the questions aside for a moment and come back to it.and come back to it.2Econ 101 M. SalemiEcon 101 M. SalemiHow Economists Measure the How Economists Measure the General Level of PricesGeneral Level of PricesA price index is an average of prices of A price index is an average of prices of different goods and services.different goods and services.We will focus on two (of many) price indices: We will focus on two (of many) price indices: The GDP DeflatorThe GDP DeflatorThe Consumer Price IndexThe Consumer Price IndexEcon 101 M. SalemiEcon 101 M. SalemiThe GDP DeflatorThe GDP DeflatorThe GDP Deflator is implicit in the values of The GDP Deflator is implicit in the values of nominal and real GDP. nominal and real GDP. NGDP = Nominal (current dollar) GDPNGDP = Nominal (current dollar) GDPRGDP = Real (base year dollar) GDPRGDP = Real (base year dollar) GDPNGDP = P x RGDPNGDP = P x RGDPSoSo……The GDP Deflator is P = NGDP/RGDPThe GDP Deflator is P = NGDP/RGDPEcon 101 M. SalemiEcon 101 M. SalemiGDP Deflator in Simple LandGDP Deflator in Simple Land$1580$1580$1400$1400$1450$1450$1606$1606$3.40$3.40250250$8$86060$2.40$2.4011511520072007$1555$1555$3.25$3.25250250$12$124040$2.10$2.1012512520062006$1450$1450$3.00$3.00250250$10$105050$2.00$2.0010010020052005PricePriceHoursHoursPricePriceJugsJugsPricePriceLoavesLoavesYearYearReal Real GDPGDPNominalNominalGDPGDPDaycareDaycareWineWineBreadBreadEcon 101 M. SalemiEcon 101 M. SalemiGDP Deflator in Simple LandGDP Deflator in Simple LandYearYearNGDPNGDPRGDPRGDP20052005$1450$1450$1450$145020062006$1555$1555$1400$140020072007$1606$1606$1580$1580Year Year GDP DeflatorGDP Deflator200520051450/1450 = 11450/1450 = 1200620061555/1400 = 1.111555/1400 = 1.11200720071606/1580 = 1.021606/1580 = 1.023Econ 101 M. SalemiEcon 101 M. SalemiPrice Changes in Simple LandPrice Changes in Simple LandYearYearBreadBreadWineWineDaycareDaycareAverageAveragePricePriceGrowthGrowthGDP GDP DeflatorDeflator20052005$2.00$2.00$10.00$10.00$3.00$3.0020062006$2.10$2.10(1.05)(1.05)$12.00$12.00(1.20)(1.20)$3.25$3.25(1.083)(1.083)11%11%1.111.1120072007$2.40$2.40(1.143)(1.143)$8.00$8.00(0.667)(0.667)$3.40$3.40(1.046)(1.046)--4.8%4.8%1.021.02Econ 101 M. SalemiEcon 101 M. SalemiUse Your Clickers to Answer Use Your Clickers to Answer The Following The Following Graded Question.Graded Question.Econ 101 M. SalemiEcon 101 M. SalemiSuppose the GDP Deflator of Simple Suppose the GDP Deflator of Simple Land is 1.00 in 2005, 1.07 in 2006, and Land is 1.00 in 2005, 1.07 in 2006, and 1.05 in 2007. Then1.05 in 2007. Then……A.A.Simple Land experienced inflation in Simple Land experienced inflation in 2006 and deflation in 2007.2006 and deflation in 2007.B.B.Prices in Simple Land rose by about 12 Prices in Simple Land rose by about 12 percent between 2005 and 2007.percent between 2005 and 2007.C.C.Simple Land experienced a large rate of Simple Land experienced a large rate of inflation in 2006 and a small rate of inflation in 2006 and a small rate of inflation in 2007.inflation in 2007.D.D.Prices in Simple Land rose by 2 percent Prices in Simple Land rose by 2 percent between 2005 and 2007.between 2005 and 2007.The Bottom Line is thatThe Bottom Line is that……The GDP Deflator is a weighted The GDP Deflator is a weighted average of prices in the economy average of prices in the economy with weights given by the relative with weights given by the relative importance of each component of importance of each component of GDP.GDP.Econ 101 M. SalemiEcon 101 M. Salemi4Econ 101 M. SalemiEcon 101 M. SalemiThe Consumer Price Index The Consumer Price Index The CPI Measures The CPI Measures ……The cost of a standard basket of goods The cost of a standard basket of goods and services and services Relative to Relative to The cost of the same basket of goods The cost of the same basket of goods and services in a fixed year, called and services in a fixed year, called the base year.the base year.Econ 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiEcon 101 M. SalemiThe Consumer Price IndexThe Consumer Price IndexThe CPI basket is based on consumption of the The CPI basket is based on consumption of the typical urban household.typical urban household.The items in the basket change slowly so that The items in the basket change slowly so that changes in the CPI are estimates of changes in changes in the CPI are estimates of changes in the the ““cost of living.cost of living.””Studies show that changes in the CPI somewhat Studies show that changes in the CPI somewhat overstate changes in the cost of living because overstate changes in the cost of living because of the availability of substitutes.of the availability of substitutes.Econ 101 M. SalemiEcon 101 M.


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UNC-Chapel Hill ECON 101 - Measuring Prices and Inflation

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