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ECO 1104 Lecture Notes - Lecture 8: Real Change, Macroeconomics, Gdp Deflator

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yellowmule951
12 Oct 2018
School
University of Ottawa
Department
Economics
Course
ECO 1104
Professor
Serge Nadeau

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ECO 1104 Full Course Notes
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Document Summary

In the real world, prices change at different speeds across time and place: this means, that at any given time wages might be rising more slowly than the price of consumer goods. Using price indexes: many economic variables give an incomplete picture when expressed in nominal terms that is, without accounting for price differences. To solve this problem, we can use price indexes to turn nominal variables into real ones. With price indexes, we can isolate changes in prices from changes in fundamentals like income and output and express those changes in constant dollars relative to a base year. Because they might be very high or very low at the time the cpi is calculated, including them might over- or understate the real change in overall prices. On the other hand, most canadians spend a large part of their income on food and gas.

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Related Questions

There are many different types of market baskets that economists measure. For example, the market basket for consumers called the 'Consumer Price Index' tracks the prices associated with the typical consumer's purchases of goods and services. The 'Producer Price Index' tracks the prices that firms receive when selling their goods and services.

Indicate the appropriate market basket to use in each of the following instances.

Consumer Price Index:

a) Measuring differences in the cost of living between different cities.
b) Examining price changes that might affect businesses.
c) Measuring the cost of living for a typical consumer.


Producer Price Index:

A) Measuring differences in the cost of living between different cities.
B) Examining price changes that might affect businesses.
C) Measuring the cost of living for a typical consumer.

To look at changes in the cost of living, we don't track the differences in each households actual expenditures from one year to the next on a market basket because:

Instructions: You may select more than one answer. 

a) consumers may substitute the relatively expensive goods with those goods whose prices have not increased rapidly as certain goods become more expensive.

b) actual expenditures may include spending outside the country.

c) people's consumption patterns may change due to tastes or changes in income that have nothing to do with changing prices.

d) innovation can lead to the introduction of new products or improvements on existing products.

e) actual expenditures may include spending on goods and services used as inputs in the production process.

a) Assuming that money market equilibrium always exists, if the national price level P increases by 5%, and real money demand L increases by 2%, then the nominal money supply M needs to increase by:

a. decrease by 7%.

b. decrease by 3%.

c. increase by 7%.

d. increase by 3%.

b) A real depreciation of the dollar against the euro occurs when:

a. there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the US inflation rate, regardless of the European rate of inflation.

b. there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the sum of the US inflation rate and the European inflation rate.

c. the cost of the US basket in terms of the European basket (European basket per US basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.

d. there is a nominal depreciation of the US dollar against the euro which is at a higher rate than the European inflation rate, regardless of the US rate of inflation.

e. the cost of the European basket in terms of the US basket (US basket per European basket) rises, where "basket" refers to the basket of goods and services used in a country's price index.