Inflation- General increase in prices for goods and services. o General increase because inflation may occur even when the prices of some goods and services decline or stay constant. Daniyal goes to the farmers market and buys a head of potatoes, lettuce, and a pound of tomatoes, and a dozen eggs for $10. Next week he returns to notice the eggs and tomatoes are now more expensive (.50 more for potatoes and eggs) totaling $11. **we are buying less with the same money**- The purchasing power of his money and ability decreased due to a general increase in prices. What causes inflation?- Economy wide changes in demand for supply for goods and money supply. Consumer Price Index- Economic indicator to measure average price of a market basket of goods and services over time.- The bureau collects data on detailed consumption habits through interviews and weekly diaries for over 10k families around the country. From that information you get the weight and purchased goods and services of what each family has, then creates an index for the average market basket purchased by the typical consumer. - While CPI represents over 200 categories of goods and services, each can be included in one of the eight major groups Food and beverages Housing Apparel Transportation Medical care Recreation Education and communication Other goods and services Calculating CPI1) Identify the goods and services purchased by the consumera. A basket of 3 pizzas and 2 gallons of milk2) Collect prices for the goods and services purchased over a time perioda. Prices in years 1, 2, and 3. You can now see the price pizza increased from $5 to $7 in the third year and milk doubled- Now calculate the market of the basket each year Year 1 : ($5 x 3 pizzas) + ($2 x 2 milks) = $19CPI Year = value of a market basket in a year x 100 value of same market basket in base year Measuring inflation using CPI Inflation rate Year = CPI Year t – CPI year t-1 x 100 CPI year t-1 Nominal and Real Income- Nominal -> actual number of dollars received in exchange for the different resources available in the economy Ex ) number of dollars you receive for your job ($3000/month)- Real income -> services that can be purchased with nominal income. Measures the purchasing power of the $3000 you earn each monthReal Income = nominal income CPI (hundredths)%⌂real income = %⌂ nominal income - %⌂
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