Inflation, Deflation And Purchasing Power II Flashcards
How is inflation measured?
It is measured by calculating the percentage increase in the price level per year (inflation rate).
A negative inflation rate is reffered to as deflation.
What is the consumer price index?
CPI measures the overall evolution of prices of consumer goods and services households need. It gives a measure of the headline inflation.
What is CPI made of?
It includes various fees and taxes associated with the purchase of goods and services. It includes indirect taxes and consumption taxes.
It excludes taxes not associated with the purchase of said goods.
What is the harmonized index of consumer prices?
HICP is a weighted average of price indices of member states in order to measure CPI for the entire Eurozone.
It is an indicator of inflation for the European Central Bank.
How does HICP differ from CPI?
CPI includes the consumer expenditure made by residens, and HICP includes the expenditure made by foreign visitors too.
What is the GDP?
It is the total value of all final goods and services produced within an economy during a specified period.
What is the GDP formula?
GDP=consumption+gross investments+government spending+(exports-imports)
What does the GDP deflator measure?
It measures the change in prices of all new, final goods and services produced domestically.
What is the GDP deflator’s formula?
Gdp deflator=(Nominal GDP/Real GDP)*100
What is the core inflation?
It is a measure of inflation which excludes certain items that face volatile price movements. It predicts long-term inflation.
What is the Purchasing Power index?
It is the quanitity of goods and services that can be bought with one monetary unit.
If the prices are increasing, the purchasing power decreases.
What is the PPI’s formula?
PPI=1/Price Index (PI)
What is Purchasing Power Parity?
Exchange rates between currencies are in equilibrium when PP is the same in the two compared countries.
What is the difference between absolute PPP and relative PPP?
Absolute PPP refers to the equalization of price levels across countries.
Relative PPP refers to the changes in price levels (inflation rate).
What is the difference between real and nominal variables?
Nominal variables are measured using current prices.
Real variables are measured using fixed prices.
Real values are adjusted for inflation, thus are expressed in purchsing power.
