ECON 2305 Lecture12Outline of Last Lecture I. Effects of unemploymentOutline of Current Lecture I. InflationII. Price Index Current LecturePrice 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 – CPIFood & BeveragesHousingTransportationMedical careCPI comparisonCPI (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 cents1955 – 26.7 cents1983 - $1 1991- $1.34 2011 - $2.20Producer 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) = $1.79CPI flaws Slow to adjust Problems dealing with technology increases Generally – CPI likely “overstates” inflationPCE – federal reserve PPI – producer price indexGDP 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
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