Macroeconomics

How is CPI calculated?

1. Fix the basket 2. Find the prices 3. Compute the basket's cost 4. Choose a base year and compute the index 5. Compute the inflation rate

Inflation is a percentage change in the overall price level. Overall price level is measured by ________

CPI and/or GDP deflator

What does CPI measure?

CPI measures the overall price levels in an economy

How do you measure inflation rate?

CPI this year - CPI last year ➗CPI last year

How do you measure CPI?

CPI= (cost of basket in current year/cost of basket in base year) * 100

How do you calculate inflation rate?

Change in GDP deflator. Use this formula: new-old/old

When Nourah purchases L.E.D lights from abroad to decorate her room, what are its effects on GDP?

Consumption increases, net exports decrease (because imports increase)

The Jones family buys an antique silver platter at an auction in upstate New York on March 22, 2019. Will his purchase be included or excluded in GDP of 2019?

Excluded. Although he made the purchase in 2019, the silver platter is an antique. To avoid double counting, the value of resold items is not included in GDP. The silver platter had already entered GDP in the year it had been manufactured.

What is the difference between GDP deflator and CPI?

GDP deflator measures prices of all good and services produced, whereas the CPI measures the prices of only the goods and services bought by consumers

What is the connection between GDP deflator and inflation?

Idk look it up

When a Saud company imports wood from Brazil, it is included in what part(s) of GDP? How will this effect overall GDP?

Investment increases and net exports decrease (this is because imports increase). There will be no overall change in KSA GDP.

Does education count as investment?

No

GDP deflator formula

Nominal GDP/Real GDP x 100

Real GDP VS. Nominal GDP

Real: constant prices, doesn't include inflation, adjusts for price changes (more accurate) Nominal: current years prices, includes inflation, doesn't adjust for price changes

Starbucks raises the price of muffins. How this effect CPI and GDP deflator?

The CPI and GDP deflator both rise.

Armani raises the price of the Italian jeans it sells in the U.S. How this effect CPI and GDP deflator?

The CPI rises, the GDP deflator does not.

Caterpillar raises the price of the industrial tractors it manufacture at its Illinois factory.How this effect CPI and GDP deflator?

The GDP deflator rises, the CPI does not.

What caused inflation in 2020 in KSA

The increase of VAT from 5% to 15%

If a Chinese firm built in the U.S. produces shoes, Does it count to Chinese or U.S. GDP?

U.S. GDP

Does building your home or adding to it count as investment?

Yes

Define GDP

the market value of all final goods and services produced within a country in a given period of time

Define relative price

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What are the shortcomings of CPI?

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