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ECON 2133 Lecture Notes - Lecture 6: Wholesale Price Index, Gdp Deflator, Nominal Interest Rate

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coffeecrow694
23 Mar 2017
School
ECU
Department
Economics
Course
ECON 2133
Professor
Elsawaf

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Document Summary

Different measures of the price level: cpi (consumer price index), ppi (producer price index/ wholesale price index), core inflation index, gdp. Consumer price index: an important measure of inflation, measures the t(cid:455)pi(cid:272)al (cid:272)o(cid:374)su(cid:373)er(cid:859)s (cid:272)ost of li(cid:448)i(cid:374)g, the basis of cost of living adjustments (colas) in many contracts and in social security. 100 x (cost of basket in current year/ cost of basket in base year: compute the inflation rate the percentage change in the cpi from the preceding period. Components of the typical american basket: biggest part is housing (43%, transportation (17%, food and beverages (15%, medical care (6%, recreation (6%, education and communication (6%, apparel (4%, other (3%) Index excludes energy and food= better measure of cost of living: substitution bias: some prices rise faster than others so consumers tend to substitute the good with a cheaper good. The cpi misses the substitution because it uses a fixed basket.

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Related Questions

Which of the following statements is true about the consumer price index (cpi):

A.It measures cost of representative basket of goods at the level of first significant commercial transaction

B.It measure of the average prices paid by consumers for all goods and services

C.It is used to measure the standard of living in an economy

D.It measures the average prices paid by consumers for a fixed basket of goods services

E. None of the above

 

 

Table 24-7. The table below applies to an economy with only two goods — hamburgers and hot dogs. The fixed basket consists of 4 hamburgers and 8 hot dogs.

Year Price of hamburgers Price of hot dogs
2009 $5 $3
2010 5.50 3.30
2011 5.61 3.63

Refer to Table 24-7. Between 2009 and 2011, the cost of living increased by

A. 17 percent.
B. 14 percent.
C. 19 percent.
D. 6 percent.

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because

A. the CPI is calculated more often than the GDP deflator is.
B. the CPI is easier to measure.
C. the GDP deflator cannot be used to gauge inflation.
D. the CPI better reflects the goods and services bought by consumers.

A COLA automatically raises the wage when:

A. the consumer price index increases.
B. the producer price index increases.
C. taxes increase.
D. GDP increases.

Measures of Inflation The GDP deflator is the broadest, most inclusive measure of change in the country's price level since it includes all final goods and services produced and sold. But the GDP deflator is not used by the government or economists as the benchmark measure of inflation; instead, the consumer price index (CPI) is used to determine changes in the cost of living. What is the shortcoming of the GDP deflator as a measure of inflation for households, and why is the CPI considered to be a more useful measure?