La Tech: Econ 201 "Measuring the Cost of Living" Chap 24 – Flashcards
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Basket Cost
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-Cost of all items in "the basket"
-cost of item 1 + cost of item 2 + cost of item 3........
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Price index
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The cost of the market basket in the current year divided by the cost of the market basket in the base year, all multiplied by 100
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Inflation example: inflation b/t 2011 and 2012
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=. (PI in 2012 - PI in 2011) / PI in 2011
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Two of the most commonly used PRICE INDEXS are
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1. The consumers price index (CPI)
2. The GDP deflator
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The GDP deflator for this year is calculated by:
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Dividing the -value of all goods and services produced in the economy this year- using -this years prices- by the -value of all goods and services produced in the economy this year- using -the base years prices- and multiplying by 100.
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The CPI reflects only:
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The prices of goods and services bought by consumers.
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Example of a GDP Deflator scenario:
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A decrease in the price of Waterman Industries deep-water reel, which is a commercial fishing product used for deep-sea fishing.
(The deflator reflects the prices of all domestically produced products. The price change will not impact the consumer price index because commercial fishing equipment is not bought by a typical US consumer.)
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Example of a CPI scenario:
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An increase in the price of Japanese-made phone that is popular among U.S. Consumers
(Reflects the prices of products purchases by typical US consumers. The price change will not affect the GDP deflator because the GDP delator reflects the prices of domestically produced goods and services.)
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The formula for converting dollar figures from an earlier era into today's dollar figures adjusted original earnings for the impact of inflation over time:
EX) Pro Golfer winnings:
FORMULA: Winnings Adjusted for Inflation =
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= National Winnings * Current Year Index/Original Year Index
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Formula for REAL INTEREST RATE
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Real Interest Rate = Nominal Interest Rate - The Inflation Rate
-Real Interest Rate can also be approximated by taking the NOMINAL INTEREST RATE - THE INFLATION RATE
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Formula for PURCHASING POWER
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Purchasing Power = Initial Deposit / Price
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Formula for PERCENT CHANGE IN PURCHASING POWER
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(New Quantity - Original Quantity) / Original Quantity * 100
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When the rate of inflation is equal to the interest rate on a deposit, the purchasing power of the deposit __________
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Remains the same over time
