ECO 2013 Measuring the Cost of Living[Ch. 11] – Flashcards

Describe a situation in which the economy's overall price level is rising.

--The percentage change in the price level from the previous period. --Compare dollar figures from different times.

-GPD Deflator *Derived from nominal and real measures of gross domestic product. **A change in the GPD Deflator reflect a change in price level for all the goods and services produced in the economy. ***Include tanks and commercial jets. ***Exclude foreign products. GDP Deflator = GDP(n) x 100/GDP(r) . Inflation rate = [GDP DEFLATOR(c) - GDP DEFLATOR(b)]/GDP DEFLATOR( b) -Consumer Price Index(CPI): * Better reflect goods and services brought by typical consumers. ** include many foreign-made products (i.e. cars). ***Exclude domestically produced goods (tanks, commercial jets) not normally purchase by the typical consumer. [(CPI(c) - CPI(b)] x 100/ CPI(c) *c current year. *b based year.

-- A measure of the overall cost of the goods and services bought by a typical consumer. -- Computed monthly by the Bureau of Labor Statistics (BLS).

1. Survey consumers to determine a fixed basket of goods. 2. Find the price of each good in each year. 3. Compute the cost the cost of the basket of goods in each year. 4. Choose one year as a base year and compute the Consumer Price Index in each year. 5. Use the consumer Price Index to compute the inflation rate from previous year.

CPI = P(c) x 100/P(b) *P(c) Current year prices. *P(b) Base year prices. The CPI for this year is calculated by dividing the cost of a given market basket of goods and services using this year's prices by the cost of a given market basket of goods and services using the base year's prices and multiplying by 100.

[(CPI(c) - CPI(b)] x 100/ CPI(c) *c current year. *b based year.

Base year dollars(b) [CPI(c)/CPI(b)]

Real Interest Rate = Nominal Interest rate - Inflation Rate