ECON 1200 1st Edition Lecture 20- Price level—A measure of the average prices of goods and services in the economyo The GDP deflator is one measure of the price level (So is the CPI)- CPI (Consumer Price Index)—a measure of the average change over time in the prices a typical urban family of 4 pays for the goods and services they purchaseo When the CPI rises, the typical household has to spend more money to maintain its standard of living o Every 2 years the BLS conducts a survey to construct a basket of goods and services purchased by a typical urban family of 4o CPI equation—(Cost of current basket/cost of base year basket)*100o The CPI holds the basket quantities constant—so changes in the CPI must be due to changes in prices The cost of the basket in the current year and the cost of the basket in the base year are always equal in the base year, so the base year CPI is always 100- Inflation Rate—The percent increase in the price level from 1 year to the nexto The percent change in CPI is one measure of the inflation rate- The GDP deflator and the CPI generally move in the same direction and economists use both to measure the price level and the inflation rate in the economyo However, the two measure do sometimes diverge because of differences in the goods and services included in each o GDP deflator (All final goods and services produced domestically, excludes imports and includes industrial and military products)o CPI (Goods and services purchased by a typical urban family of 4, includes imports and excludes military and industrial products)- The percentage change in the CPI is the most widely used measure of the inflation rate because changes in the CPI are the best measure of changes in the cost of living as experienced by the typical household- The inflation rate measures how quickly and in which direction the price level is changingo A positive inflation rate indicates that the price level is rising (experiencing inflation) and a negative inflation rate indicates that the price level is falling (experiencing deflation)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