Fundamental terms - Inflation

Question 1

2 key measures used to track changes in price levels over time

Answer 1

1) GDP deflator
2) Consumer price index (CPI)

Question 2

What does the inflation rate measure?

Answer 2

how much the overall price level in an economy increase over a period in %

Question 3

What does inflation reflect?

Answer 3

How the purchasing power of money decreases as prices rise

Question 4

What is the nominal GDP?

Answer 4

The total value of all goods & services produced in an economy at current market prices (without adjustment for inflation)

Question 5

What is the real GDP?

Answer 5

The total value of all goods and services produced at constant prices (adjusted for inflation)

Question 6

GDP deflator formula

Answer 6

P = Nominal GDP / Real GDP = €Y / Y

Question 7

What does the GDP deflator show?

Answer 7

How much of the increase in the GDP is due to inflation, not from real increases of the quantity of goods & services produced

Question 8

What does the CPI measure?

Answer 8

the average change in prices over time that consumers pay for a fixed basket of goods & services

Question 9

hat does CPI stand for?

Answer 9

consumer price index

Question 10

Why do consumers care about CPI? What does it reflect?

Answer 10

It reflects the prices of goods which are typically consumed by households ( eg food, housing, transportation & entertainment).
Consumers care as it directly affects their cost of living

Question 11

What is the difference between the GDP deflator & CPI

Answer 11

GDP deflator: covers all goods & services produced domestically -> calculated with nominal & real GDP
CPI: only the prices of consumption goods -> provides a more consumer-focused view of inflation

Question 12

Nominal GDP formula

Answer 12

nominal GDP = Σ(Quantity of goods & services * current prices)

eg: nominal GDP = (cars produced (100) * current price (20000) + (computers produced (200) * current price (1000))

Question 13

Real GDP formula

Answer 13

Real GDP = Σ( Quantity of Goods & Services * Base year prices)
so a constant price of a base year is used

Question 14

Difference between nominal GDP & Real GDP

Answer 14

Nominal GDP: uses current prices (including inflation), so price changes and changes in production are reflected
real GDP: uses constant prices from a base year. Allowing to isolate the true growth in production by removing the effect of inflation