Chapter 23 Flashcards
Consumer Price Index (CPI)
a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services.
When calculating the CPI, we have an established
reference base period of average prices and an established market basket.
The reference base period of CPI
some year in which we have set the CPI to 100 to serve as a benchmark and allows us to understand changes to CPI.
3 Steps to calculate CPI
Find the cost of the CPI market basket at base period prices; Find the cost of the CPI market basket at current period prices; Calculate the CPI for the base period and the current period.
Formula for calculating CPI
(Cost of CPI basket at current period prices)/(Cost of CPI basket at base period prices)X100
Inflation Rate
the percentage change in the price level from one year to the next
Inflation rate formula
(CPI in current year - CPI in previous year)/(CPI in previous year)X100
Deflation
a situation in which the price level is falling and the inflation rate is negative.
Potential sources of CPI bias include
New Good Bias; Quality Change Bias; Commodity Substitution Bias; Outlet Substitution Bias
New Good Bias
iPod vs. Discman
Quality Change Bias
2017 Ford Focus vs. 1991 Ford Focus
Commodity Substitution Bias
Substitute from higher priced carrots to lower priced broccoli
Outlet Substitution Bias
Buying goods online for less
Alternative Measures of the Price Level and Inflation Rate
GDP price index (the GDP Deflator)
Personal consumption expenditures (PCE) price index
PCE price index excluding food and energy
The GDP Price Index
an average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices.
The GDP price index uses
the prices of all the goods and services in GDP
All the goods and services in GDP
consumption goods and services, capital goods, government goods and services, and export goods and services
The CPI uses
prices of consumption goods and services only.
The GDP price index weights
each item using information about current quantities.
The CPI weights
each item using information from a past Consumer Expenditure Survey.
The Personal Consumption Expenditures (PCE) Price Index
is an average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices.
The (PCE) Price Index Excluding Food and Energy
is known as the Core Inflation Rate which reflects the annual percentage change in the PCF price index excluding the prices of food and energy.
When we talk about Nominal and Real Values, we are effectively indicating ____
if we have adjusted for inflation or not.
Nominal values
have not adjusted for inflation and will strictly look at the change between periods.
Real values
adjust for inflation and will factor that in when comparing different periods.
The nominal wage rate
is the average hourly wage rate measured in current dollars.
The real wage rate
is the average hourly wage rate measured in the dollars of a given reference base year.
Real wage rate formula
(Nominal wage rate in current year)/Current year CPI)X100
Nominal Interest Rate
is the dollar amount of interest expressed as a percentage of the amount loaned.
Real interest rate
is the goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate.
Real interest rate
Nominal Interest Rate - Inflation Rate
