Chapter 8 CPI & Inflation Flashcards
What is inflation?
it is how fast prices rise from year to year. it is NOT an increase over a base year.
Inflation rate: GDP deflator (t) - GDP deflator (t-1) / GDP deflator (t-1). x 100
What is a market basket?
a list of specific G+S that consumers spend their money on
you can find the cost of G+S over time by using the rate of change
What is CPI?
the consumer price index measures how much the cost of the basket changes over time. (how we measure inflation)
in the base year, CPI = 100
an increase in the basket = an increase in the cost of living
CPI= Basket (t)/ Basket (base year) x 100
what is headline Inflation? (all items inflation)
changes in prices for the entire market basket of the average urban household
(food and energy)
What is core inflation?
price changes of G+S, not including Food and energy (which can change rapidly)
it shows the relationship between the price of G+S and the level of consumer income
What are price indexes?
they are used to compare dollar figures from different points in time.
Inflation rate: CPI (t) - CPI (t-1) / CPI (t-1)
How do you deflate a nominal variable?
current value (t) = past value (t-1) x CPI (t) / CPI (t-1)
RGDP = Nominal GDP / CPI
What is COLA?
Cost of Living Allowance
automatically increases the wage when CPI increases
increase of cost of living adjustments (basically the same as CPI)
Indexing
automatically increases payments in proportion to the cost of living.
What is Purchasing Power Parity?
how much a dollar can buy you around the world after the exchange rate
it compares the value of currencies based on the cost of living and inflation rates in different countries.
it will not work for
1. transaction costs
2. non - tradeables
3. trade restrictions.
price levels are typically lower in poorer countries
What is Producer price index?
Producer price index measures the price of G+S purchased by firms- including capital goods and raw materials
PPP adjusted GDP = GDP in nominal value (country A) x [ 1 / 1 + Price level adjustment % (country A) ]
