ECO 1102 Lecture Notes - Lecture 8: Industrial Revolution, Power Tool, Opportunity Cost

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Using price indices: similar to gdp, economic variables give an incomplete picture when expressed in nominal terms, as their real value may be different over time, price indices transform nominal values into real values. Isolate changes in prices from changes in other economic variables, like income and output. The inflation rate: the inflation rate is the size of the change in the overall price level. It is calculated as the percentage change in the cpi from year to year: Inflation = cpi year 2 - cpi year 1 / cpi year 1 x 100. The middleman wholesale retailer = 3: gdp deflator measures the price of goods and services produced in the country. Adjusting for inflation: indexing: a fundamental theory in macroeconomics states that wages should naturally rise to offset the effects of inflation, however, there are times when some prices change faster than wages.

Related Questions

The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year.

Year	Consumer Price Index	Inflation Rate
2005	100
2006	115	B
2007	125	C
2008	140	D
2009	A	10%
2010	160	E

8.7%

120

25%

12%

The price index was 170 in the first year, 180 in the second year, and 195 in the third year. The inflation rate was about

5.9 percent between the first and second years, and 8.3 percent between the second and third years.

5.6 percent between the first and second years, and 7.7 percent between the second and third years.

10 percent between the first and second years, and 15 percent between the second and third years.

80 percent between the first and second years, and 95 percent between the second and third years.

0.1 points

QUESTION 17

The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced

		5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years.
		7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years.
		5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years.
		7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years

0.1 points

QUESTION 18

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

The real interest rate is the nominal interest rate minus the rate of inflation.

The real interest rate is the nominal interest rate times the rate of inflation.

The real interest rate is the nominal interest rate plus the rate of inflation.

The real interest rate is the nominal interest rate divided by the rate of inflation.

0.1 points

QUESTION 19

If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is

4 percent.

-4 percent.

3 percent.

8 percent.

0.1 points

QUESTION 20

If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is

9.5 percent.

4.5 percent.

-4.5 percent.

-9.5 percent.

. From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010?

0.9%

9.0%

2.5%

90%

If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?

20.0%

45.5%

16.7%

9.1%

. Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basketâs cost was $80; in 2014, the basketâs cost was $86; and in 2015, the basketâs cost was $90. The value of the CPI in 2015 was

104.6 and the inflation rate was 4.6%.

112.5 and the inflation rate was 4.6%.

112.5 and the inflation rate was 12.5%.

104.6 and the inflation rate was 12.5%.

Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basketâs cost was $80; in 2008, the basketâs cost was $92; and in 2010, the basketâs cost was $108. The base year must be

The base year cannot be determined from the given information.

2002

2008

one of the years between 2008 and 2010.

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basketâs cost was $80.00; in 2013, the basketâs cost was $84; and in 2014, the basketâs cost was $87.60. The value of the CPI was

All of the above are correct.

109.5 in 2014.

105 in 2013.

100 in 2012.

Which of the following is correct?

The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.

The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.

The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.

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

The inflation rate is defined as the

percentage change in the price level from the previous period.

price level in an economy.

change in the price level from one period to the next.

price level minus the price level from the previous period.

Economists use the term inflation to describe a situation in which

the economy's overall price level is rising.

some prices are rising faster than others.

the economy's overall price level is high, but not necessarily rising.

the economy's overall output of goods and services is rising faster than the economy's overall price level.

Use the data in the Table to answer the questions asked in 4a and 4b on each of the 3 variables for the US economy:

a. Calculate the changes in inflation rates, unemployment rates and the RGDP growth rates for the years from the Year 2007 through 2013 and show them in a new column next to each of the values of the three variables (a template of the table is given below). 5 pts

Year	Real GDP	RGDP growth rate in %	Unemployment Rate	Change in U rate in %	CPI Indices	Inflation rate in %
2006	14,613.8	-	4.6%	-	201.6	-
2007	14,873.7	?	4.6%	?	207.3	?
2008	14,830.4	?	5.8%	?	215.3	?
2009	14,418.7	?	9.3%	?	214.53	?
2010	14,783.8	?	9.6%	?	218.05	?
2011	15,020.6	?	8.9%	?	224.93	?
2012	15,369.2	?	8.1%	?	229.59	?
2013	15,710.3	?	7.3%	?	232.95	?

Source: for CPI and U-Rate date: www.bls.gov

For RGDP data: www.bea.gov

b. Based on those calculations, briefly describe the overall economic performance over the last 7 years (2006-2013) and critically predict about these three macroeconomic variables for 2014-15 (2014 data is not updated yet).

Hint: While predicting the trend for 2014-15 (based on the growth rates and trend you estimated in the table above), it is imperative to observe the most recent data on these three variables.

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1) Assume there is a simple economy where people consume only 2 goods, food, and clothing. Further, assume that the market basket of goods used to compute the CPI consists of 100 units of food and 20 units of clothing.

	Food	Clothing
2004 price per unit	$8	$20
2005 price per unit	$12	$40

Compute the percentage changes in the price of food and the percentage change in the price of clothing between 2004 and 2005.

Calculate the percentage change in the CPI between 2004 and 2005.

Do you think the CPI price changes affect all consumers in the economy to the same extent? Explain.

2) Calculate how much each of the following items is worth in terms of today's dollars using 180 as the price index for today.

a. In 1925, the CPI was 18 and the price of a movie ticket was $0.30.

b. In 1930, the CPI was 14 and a cook earned $20 a week.

c. In 1940, the CPI was 16 and a gallon of gas cost $0.20.

3) The table below uses data for 3 hypothetical countries. All the number values are in thousands. Complete the blank entries in the table below.

Country	Adult Population	Labor Force	Employed	Unemployed	Unemployment Rate	Labor-Force Participation Rate
A	120,000		60,000	4,500
B		28,000		3,000		60
C	70,000	40,000			10

4) The following table indicates U.S. real GDP data. Calculate real GDP per person for 1987 and 2005. Then use real GDP per capita to compute the percentage change in real GDP per person from 1987 to 2005.

Year

Real GDP (2000 prices)

(in million)

Population

(in million)

1987

$6,435,000

243

2005

$11,092,000

296.6

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ECO 1102 Lecture Notes - Lecture 8: Industrial Revolution, Power Tool, Opportunity Cost

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