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ECON 203 > Topic 5_ Measuring the Price Level > Flashcards

Topic 5_ Measuring the Price Level Flashcards

1
Q

Price level

A

measure of the average prices of g/s in the economy

since this includes 1000s of prices, it is composed as an index

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2
Q

Inflation

A

a general increase in the prices of g/s over time

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3
Q

Inflation Rate

A

the percentage invrease in the price level from one year to the next

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4
Q

Inflation Rate formula

A

current year price level- previous year price level

DIVIDED BY previous year price level

MULTIPLED BY 100

Pc - Pl / Pl x 100

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5
Q

3 sources of inflation

A

Demand Pull

more demand in g/s ( supply nd demand)

Cost Push

increases in costs of production (prices raised)
-WORKERS demand higher wages, so this also increases prices (Wage-Price spiral)

Central Banks Printing too much money

a monetary expansion leads to increasing output, decreasing interest rate, increasing price level; long term it only increases in price level

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6
Q

Wage price spiral

A

this happens in response to cost push inflation, and can also cause more inflation

as prices in the eocnomy rise, workers demand higher wages, they are actually an input to production and when they are paid mor eprices rise even more

THIS IS CALLED THE WAGE PRICE SPIRAL

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7
Q

3 measures of price level

A

The GDP deflator
The PPI
The CPI

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8
Q

The GDP deflator

A

broadest measure of the price level, includes the price of all final g/s produced in the country

FORMULA: NOMINAL GDP/REAL GDP x 100

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9
Q

PPI

A

the producer price index

includes all the prices of g/s recieved by producers in all stages of production (INTERMEDIATE GOODS and raw materials)

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10
Q

CPI

A

measure of the changes in the cost of living

includes the price of g/s purchased by consumers

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11
Q

GDP deflator in the base year

A

the formula is nominal gdp/real gdp x 100 and in the base year the nominal gdp= real gdp so in base year it is just 100

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12
Q

why is gdp deflator not the best measure of price level that reflects cost of living

A

because, a lot of goods households consumer are imported

and because gdp deflator includes goods that households dont buy ( capital goods bought by factories)

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13
Q

How to calcualte nominal gdp

A

p x q in a given year * 100

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14
Q

how to clauclate real gdp

A

BASE YEAR PRICE

quantity x base year price* 100

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15
Q

why is it important if ppi rises

A

the prices of goods to firms rising means that cost push inflation may be upcoming and that this will future impact whaat prices g/s sold ot consumers

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16
Q

What can ppi warn us about

A

movements in cpi!

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17
Q

WHAT Is the average of the prices of g/s purchased by a typical hosuehold

A

it is essentially a typical ‘basket’ of goods and services bought by any household

18
Q

how is cpi calculated

A

1) stat canada surveys consumers to determine what is in the typical shopping basket
2) stat canada collects data on prices of all g/s
3) They use the prices to compute the TOTAL COST of the basket (choose a base year QUANTITY)
4)Compute the cpi index via formula

Cost of basket in current year/ Cost of basket in base year x 100

5) Inflation rate is calculated

L-F/F x 100 of

CPI today-CPI last yeyar/CPI last year * 100

19
Q

CPI formula

A

cost of basekt in current year/ Cost of basket in base year x 100

20
Q

what are the units of cpi

A

no units, because they are index numbers

21
Q

what is cpi intended to measure

A

measure changes in price level over time

22
Q

cpi formula

A

CPI current year/ CPI base year x 100

23
Q

inflation rate formula for cpi

A

cpi this year - cpi last year/ cpi last year *100

24
Q

why does cpi overestimate the changes in price

A

1 substitution bias
2 new product bias
3increase in quality bias
4 outlet bias

25
Q

cpi substitiuton bias

A

over time, some prices will rise faster than others

sub rule: consumers tend to buy goods that are comparatively cheaper

CPI DOES NOT ACCOUNT FOR SUBS bc it uses a fixed basket of goods an services

so CPI overestimates cost of living bc the fixed quantity has gone down

26
Q

what do we fix when we calc cost of basket in cpi

A

the AMOUNT (quanity) of good bought

this affects us late rin sub rule

27
Q

CPI new product bias

A

cpi relies on a fixed basket year over year

if a new cheaper products replace an old expensive products, the CPI will MISS decrease in cost and conseuqently OVER ESTIMATE the cpi

28
Q

CPI quality bias

A

over ime,most products in cpi improve in quality!!!

therefore, the increase in prices of these products partly refelct their imporved quality AND also are partially pur inflation

cpi once again overinflates cost of living

29
Q

CPI outlet bias

A

when prices rise, consumers will change where they buy stuff, switchin to warehouse sotres w LOWER PRICES

COSTCO

CPI does not account for these changes bc i uses fixed basket of g/s

CPI overestiamtes cost of living

30
Q

Because of 4 issues in cpi (outlet, sub, quality, new product) how much does cpi overestimate true inflate rate by

A

0.5-1%

THIS IS VERY IMPORTANT bc welfare payments and contract have costo f living adjusted based on CPI

31
Q

How to use price indexes to adjust for inflation

A

value in a pasts dollars x CPI current year/CPI last year

32
Q

Nominal variable

A

measured in dollars, whos value fluctuates over time

33
Q

Real variable

A

a variable that has been adjusted to account for inflation; measuredin dollars for the base year for the price index

REAL VBL = nominal vbl/Price index x 100

34
Q

REAL vs nominal interest rates

A

REAL int rate ~= Nominal Interest rate-Inflation Rate

35
Q

Interst rate

A

cost of borrownig money expressed a percenteng of the amount borrowed

36
Q

nominal interest rate

A

stated interest rate without correction for inflation

MEASURES THE RETURN IN DOLLARS

37
Q

Real interset rate

A

interest rate iin terms of changes in the purchasing power

FOCUSES ON WHAT YOU CAN BUY WIHT THOSE DOLLARS

38
Q

WHich is better real int rate or nominal int rate

A

real OFC bc real accounts for purcahsing poewer of dollars not just the amount of dolalrs

39
Q

what is real interest rate a true measure of

A

THE TREUC OST OF BORROWING nad the TRUE return of lending

40
Q

on a chart of nominal interest rate and real interest rate, what is the distance bw the two ?

A

RATE OF INFLATION

ECON 203 (16 decks)

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