Econ 104 1st Edition Lecture 10 Outline of Last Lecture I Possible Questions from exam 1 Outline of Current Lecture II Consumer Price Index III Disinflation Deflation inflation IV How to calculate CPI Current Lecture V VI Consumer Price Index A measure of the average change over time in the prices of the goods and services purchased by the typical urban family of four a The CPI is a statistical estimate constructed using theprices of a sample of representative items whose prices are collected periodically b The CPI is calculated by the Bureau of Labor Statistics c CPI differs from GDP because in CPI the price is the variable with the goods fixed constant while GDP has variable goods with price fixed constant Disinflation vs deflation vs inflation a Disinflation i Disinflation is a convenient way of saying that the inflation rate is decelerating prices are still going up over time but they re not increasing as fast as they were in some previous time period 1 The inflation rate is less than 0 but prices are still rising b Deflation i When prices deflate not surprisingly they drop continuously over time c Inflation i Inflation is a pretty familiar phenomenon for most people we re used to seeing prices go up generally over time 1 Inflation rate is greater than 0 ii People become uncertain about how much prices will go up in the future and lenders must charge higher and higher rates of interest to preserve their after inflation return Inflation can be especially disruptive if the prices are increasing faster than wages A small amount of inflation is usually perceived as acceptable if it s not a big surprise 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 VII Example of CPI a Consider a simple economy with 2 goods Year Price of Hot Dogs Quantity of HD Price of Hamburgers Quantity of HB 1999 1 00 4 2 00 2 2011 2 00 6 3 00 3 2012 2 25 8 3 50 2 b To calculate CPI use 1999 as the base year for amount of goods being produced i Fix the Basket 4 hot dogs and 2 hamburgers ii Find the Cost of the basket each year Year Hot Dog Price Hamburger Price Cost of Basket 1999 4 4 8 2011 8 6 14 2012 9 7 16 c Calculate CPI i CPI Cost of Basket in Current Year Cost of Basket in Base Year X 100 ii CPI of 1999 8 8 X 100 100 1 Base year CPI is always 100 iii CPI of 2011 14 8 X 100 175 iv CPI of 2012 16 8 X 100 200
View Full Document
Unlocking...