Econ 104 1st Edition Lecture 10Outline of Last Lecture I. Possible Questions from exam 1Outline of Current LectureII. Consumer Price IndexIII. Disinflation, Deflation, inflation IV. How to calculate CPICurrent LectureV. 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 foura. The CPI is a statistical estimate constructed using theprices of a sample of representativeitems 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. VI. 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 increasingas fast as they were in some previous time period.1. The inflation rate is less than 0 but prices are still risingb. 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 0ii. 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 CPIa. Consider a simple economy with 2 goodsYear Price of Hot Dogs Quantity of HD Price of Hamburgers Quantity of HB1999 $1.00 4 $2.00 22011 $2.00 6 $3.00 32012 $2.25 8 $3.50 2b. To calculate CPI use 1999 as the base year for amount of goods being produced. i. Fix the Basket: 4 hot dogs and 2 hamburgers ii. Find the Cost of the basket each year Year Hot Dog Price ($) Hamburger Price ($) Cost of Basket ($)1999 4 4 82011 8 6 142012 9 7 16c. Calculate CPI:i. CPI = (Cost of Basket in Current Year)/ (Cost of Basket in Base Year) X 100ii. CPI of 1999 = 8/8 X 100 = 1001. Base year CPI is always 100iii. CPI of 2011 = 14/8 X 100 = 175iv. CPI of 2012 = 16/8 X 100 =
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