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AMU ECON 201 - Measuring the Price Level and Inflation
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Slide 1IntroductionSlide 3Slide 4Slide 5Measuring the Price LevelThe Consumer Price Index: Measuring the Price LevelSlide 8Monthly Household Budget of the Typical Family in 1995 (Base Year)Cost of Reproducing the 1995 (Base-Year) Basket of Goods and Services in Year 2000Slide 11Slide 12Slide 13Measuring the Inflation Rate: The rate of change in the price levelInflationSlide 16Slide 17Calculating Inflation Rates: 1972 - 1976Calculating Inflation Rates: 1929 - 1933Slide 20Adjusting for InflationComparing the Real Values of a Family’s Income in 1995 and 2000Slide 24Slide 25Slide 29Slide 30Slide 35Inflation and Interest RatesSlide 37Slide 38Slide 39Slide 40Slide 41Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Slide 52Inflation and Interest Rates in the United States, 1960 - 2001The Costs of InflationThe Costs of Inflation: Not What You ThinkSlide 56Slide 57The True Costs of InflationSlide 59Slide 60Slide 61Slide 62Slide 63Slide 66Slide 67HyperinflationSlide 69Slide 70Measuring the Price Level and InflationMeasuring the Price Level and InflationPrinciples of Macroeconomics Dr. Gabriel X. MartinezAve Maria UniversityChapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation22Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. IntroductionIntroductionWhat is the lowest price you remember for a What is the lowest price you remember for a can of Coke?can of Coke?What is the current price?What is the current price?Are we all poorer because of this?Are we all poorer because of this?How can we measure these changes?How can we measure these changes?Chapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation33Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. IntroductionIntroductionA A market basket:market basket:–Describes all the things that a consumer Describes all the things that a consumer purchases in a given time period called a purchases in a given time period called a base base yearyear..–The prices of items in the market basket are The prices of items in the market basket are weighted by the importance of the item in the weighted by the importance of the item in the consumer’s purchase habits.consumer’s purchase habits.–Example:Example:The one automobile purchased during the year The one automobile purchased during the year enters at the price of the car, say $25,000.enters at the price of the car, say $25,000.The five cans of beans costing 99¢ each is entered The five cans of beans costing 99¢ each is entered as 5 X 99 = $4.95.as 5 X 99 = $4.95.Chapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation44Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. A A market basket:market basket:–Describes all the things that a consumer Describes all the things that a consumer purchases in a given time period called a purchases in a given time period called a base base yearyear..–The prices of items in the market basket are The prices of items in the market basket are weighted by the importance of the item in the weighted by the importance of the item in the consumer’s purchase habits.consumer’s purchase habits.–Example:Example:The one automobile purchased during the year The one automobile purchased during the year enters at the price of the car, say $25,000.enters at the price of the car, say $25,000.The five cans of beans costing 99¢ each is entered The five cans of beans costing 99¢ each is entered as 5 X 99 = $4.95.as 5 X 99 = $4.95.IntroductionIntroductionChapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation55Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. IntroductionIntroductionA A base yearbase year–is arbitrarily chosen as a is arbitrarily chosen as a reference pointreference point for the for the price comparisons.price comparisons.A A price indexprice index–compares the prices of the market basket in the compares the prices of the market basket in the base year with the prices of the base year with the prices of the same basketsame basket in in a target (current) year.a target (current) year.$base year$current yearMeasuring the Price LevelMeasuring the Price LevelChapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation77Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. The Consumer Price Index: The Consumer Price Index: Measuring the Price LevelMeasuring the Price LevelConsumer Price Index (CPI)Consumer Price Index (CPI)–For any period, …For any period, …–……measures the cost in that period of a standard measures the cost in that period of a standard basket of goods and services (for an urban basket of goods and services (for an urban consumer) …consumer) …–… … relative to the cost of the same basket of relative to the cost of the same basket of goods and services…goods and services…–……in a fixed year, called the in a fixed year, called the base year.base year.Chapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation88Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. The Consumer Price Index: The Consumer Price Index: Measuring the Price LevelMeasuring the Price LevelConsumer Price Index (CPI)Consumer Price Index (CPI)100year basein services and goods ofbasket year -base ofCost yearcurrent in services and goods ofbasket year -base ofCost CPI 100Basket ofCost Basket ofCost CPIpricesyear basepricescurrent Chapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation99Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Monthly Household Budget of the Monthly Household Budget of the Typical Family in 1995 (Base Year)Typical Family in 1995 (Base Year)Item Cost (in 1995)Rent, two-bedroom apartment $500Hamburgers (60 at $2.00 each) 120Movie tickets (10 at $6.00 each) 60Total expenditure $680Constructing a Hypothetical CPIChapter 19: Measuring the Price LeChapter 19: Measuring the Price Level and Inflationvel and Inflation1010Copyright c 2004 by The McGraw-HillCompanies, Inc. All rights reserved. Cost of Reproducing the 1995 (Base-Year) Cost of Reproducing the 1995


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AMU ECON 201 - Measuring the Price Level and Inflation

Course: Econ 201-
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