Inflation Average increase in price Alternative measure of inflation cid 127 GDP deflator Consumer price index Producer price index Nom GDP PxQ Real GDP Q Nom GDP Real GDP x100 GDP deflator cid 127 measure of the overall level of prices CPI Consumer Price Index How the CPI is calculated 1 Fix the basket Find the prices cid 127 One way to measure thee economy s price changes is to compute the percentage increase in the GDP deflator from one year to the next the Bureau of Labor statistics surveys consumers to determine what s in the typical consumers shopping basket The BLS collects data on the prices of all the goods in the basket Compute the basket s cost use the prices to compute the total cost of the basket Choose a base year and compute the index the CPI in any year Cost of basket in current year cost of basket in base year x100 Compute the inflation rate the percentage change in the CPI from the preceding period inflation rate CPI this year CPI last year CPI last year x100 Problems with CPI Peep da lecture notes from 2 25 Substitution Bias overtime some prices rise faster than others consumers substitute PPI Producer Price Index exactly the same as CPI but in the lens of a producer Differences between CPI and GDP deflator Imported consumer goods included in CPI not included in GDP deflator Capital goods Not included in CPI The basket CPI uses fixed basket ex the minimum wage 1 15 in Dec 1964 5 85 in Dec 2007 Included in GDP deflator f produced domestically cid 127 GDP deflator uses basket of fixed goods and services Correcting variables for inflation inflation makes it harder to compare dollar amounts from different times To compare use CPI to convert 1964 figure into today s dollars Amount in today s dollars amount in year T dollars x price level today price level in year T A dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract ex the COLA in many multi year labor contracts Real vs nominal interest rates the nominal interest rateL The interest rate is NOT corrected for inflation The rate of growth in the dollar value of a deposit or debt the real interest rate corrected for inflation Real interest rate nominal interest rate interest rate cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127 cid 127
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