Macro Economics 11

What are the issues with the consumer price index?

*substitution bias * introduction of new goods *unmeasured quality change

Differences between GDP Deflator and Consumer price index

1. GDP deflator reflects the prices of all goods and services produced domestically, whereas the consumer price index reflects the prices of all goods and services bought by consumers. 2. The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year. Only occasionally does the BLS change the basket of goods. By contrast, the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

Amount in today's dollar=

Amount in year T dollars x Price Level today/ Price level in Year T

Inflation Rate Formula

CPI yr 2 - CPI yr 1/ CPI yr 1

Consumer Price Index

Goods priced in current years / price in base year

unmeasured quality change

If the quality of a good deteriorates from one year to the next while its price remains the same, the value of a dollar falls, because you are getting a lesser good for the same amount of money.

Nominal IR

Measure change in dollar amount

Real Interest

Measures the correction for inflation

introduction of new goods

When a new good is introduced, consumers have more variety from which to choose, and this in turn reduces the cost of maintaining the same level of economic well-being.

substitution bias

When prices change from one year to the next, they do not all change proportionately

producer price index

a measure of the cost of a basket of goods and services bought by firms

consumer price index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

The goal of the consumer price index is to measure what?

changes in the cost of living

indexed

the automatic correction by law or contract of a dollar amount for the effects of inflation