ECON 2305 Lecture 12 Outline of Last Lecture I Effects of unemployment Outline of Current Lecture I Inflation II Price Index Current Lecture Price Index The cost of today s market basket of goods expressed as a percentage of the same market basket during a base year Cost of Market Basket today Cost of market basket in base year Market basket of goods CPI Food Beverages Housing Transportation Medical care CPI comparison CPI Consumer Price index Statistical measure of a weighted average of prices of a specified set of goods and services purchased by typical consumers in urban areas 1927 17 5 cents 1955 26 7 cents 1983 1 1991 1 34 2011 2 20 Producer Price Index A statistical measure of a weighted average of prices of goods and services that firms produce and sell GDP Deflator A price index measuring all the new goods and services produced in the economy These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Personal Consumption Expenditure Index A statistical measure of average prices that uses annually updated weights based on surveys of consumer spending Protecting against inflation Cost of living adjustments clauses Clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living Gas 20 5 cents per gallon in 1955 Is this higher or lower than what we pay today What is equivalent price in 2013 Nominal dollars unadjusted Real dollars adjusted 1955 price x 2013 1955 Answer 205 x 2 33 267 1 79 CPI flaws Slow to adjust Problems dealing with technology increases Generally CPI likely overstates inflation PCE federal reserve PPI producer price index GDP deflator broader and more adjustment Use to determine real GDP Inflation A sustained increase in the average of all prices of goods and services in an economy Who is impacted by inflation Fixed income folks Creditors Re pricing Menu costs Business difficult to plan
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