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O-K-State ECON 2203 - Principles of Macroeconomics 5

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ECON 2203 1st Edition Lecture 6KeyEquationsExamplesDefinitionsImportant InformationOutline- The difference between CPI and GDP deflator How to calculate CPI in the real world? • The Bureau of Labor Statistic (BLS) of the Department of Labor prepares the CPI• To calculate Overall price level of a country– “A typical consumer”• Represent the whole country’s consumption behavior• This typical consumer may not exist– Add more variety of goods and services to the basket– Estimate overall price of each type of goods and services. • For example, we cannot use the price for Coca-Cola.But we have to calculate a price for both Coca-Cola and Pepsi.How to calculate CPI in the real world?• Compare to a simple economy in previous exampleStep 1: Fix the basket of a typical consumerA Simple Economy 10 - Hot Dogs6 - Coca Cola’sIn the Real World Thousands of goods & servicesThese 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.The Typical Basket of Goods and Services in real worldTransportation (17%)Food and beverages (15%)Education and communication (6%)Medical care (7%)Recreation (6%)Apparel (4%)Housing (42%)Other goods and services (3%)What’s in the “Market baskets”?Housing - Rent of primary residence, owners' equivalent rent, furniture Transportation - New vehicles, airline fares, gasoline, vehicle insuranceFood and Beverages- Breakfast cereal, coffee, chicken, wine, snacksApparel - Men's shirts and sweaters, women's dresses, jewelry Medical care- Prescription drugs, eye care, hospital services Recreation- Televisions, toys, pets and pet products, sports equipmentEducation and Communication - College tuition, telephone services, computer software and accessories Other goods and services- Tobacco, haircuts and other personal services, wedding expense Step 2: Find the prices– In the real world, each month, “price collectors” contact retail stores, homeowners, and tenants in selected cities throughout the United States. “Price collectors” or Economic assistants calculate overall price of each type of goods and services by using statistic tools. Step 3: Compute the Cost of the basket in each year – Same but with thousands prices and thousands goods.Step 4:Choose base year and compute the index– A simple Economy: Choose any year as the base year– BLS uses the average CPI of 1982-1984 as the base yearStep 5: Compute Inflation rates – SameSummary: • The BLS collects and processes data on the prices of thousands of goods and services every month. • BLS uses data on the price of thousands of goods and services to record average prices for a “market basket” of different items purchased by the typical urban family• By following previous 5 steps, the BLS calculates the CPI and inflation rate to determine how quickly the cost of living for the typical consumer is rising• For more information on CPI, refer to the following link: http://www.bls.gov/cpi/cpifaq.htmThe GDP deflator versus the CPI • Price Level of an economy: the GDP deflator and CPI – Review: ����������� ���= (Nominal GDP/Real GDP) x 100• 1st difference: – GDP deflator reflects the prices of all goods and services bought domestically• Y= C + I + G + EX - IM • Does not measure prices of imported goods– CPI reflects the prices of all goods and services bought by consumers• Measure prices of imported goods purchased by consumers. • Does not measure prices of goods purchased by firms (companies), governments and foreignersExample 1:A decrease in the price of domestically produced industrial robots will be reflected ina. Both the GDP deflator and the consumer price index b. Neither the GDP deflator nor the consumer price index c. The GDP deflator but not in the consumer price index d. The consumer price index but not in the GDP deflatorQuestion: In which of the following cases would there be an effect on the value of the U.S. consumer price index, but not on the value of the U.S. GDP deflator? a. All of the truck tires that are produced by a certain company in South Korea are sold to the U.S. military, and the price of these tires decreases- NOT IN GDP deflator and NOT IN CPIb. All of the truck tires that are produced by a certain company in California are sold to the U.S. military, and the price of these tires decreases- INGDP deflator andNOT INCPIc. Most of the bananas that are produced by a certain company in Mexico end up in U.S. grocery stores and the price of these bananas increases- NOT IN GDP deflator and IN CPId. Most of the earth-moving machines that are produced by a certain company in Illinois are exported to other countries, and the price of these machines increases- IN GDP deflator and NOT IN CPIThe GDP deflator versus the CPI•2nd difference: – GDP deflator compares the price of currently produced goods and services to the priceof the same goods and services in the base year• The included goods and services change over time. – CPI compares the price of a fixed basket of goods and services to the price of the basket in the base year• The included goods and services do not changePrinciples of MacroeconomicsLecture Notes> VERY DETAILED> COLOR CODED> Easy to read> May include information that was stated directly from the teacher in class<p>Principles of Macroeconomics</p><p>Introduction to Macroeconomics</p><p>Hui Ding</p><p>Outline &bull; Real, Nominal GDP &bull; GDP deflator, and Inflation rate &bull; Is GDP a good


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