measures of inflation

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what is inflation rate based on?

the CPI measure computed every year; changes from year to year

consumer price index (CPI)

uses a fixed weighted market basket of goods and services that the average consumer purchases regularly

weighted

worth more than other items

list of leading indicators

average hourly work week, building permits, stock market, inventories

substitution bias weakness of CPI

does not take into account the fact that consumers work their way around costly items; interprets an increase in a good as inflation and does not consider the fact that consumers will buy its substitute instead ex: chicken prices increase, turkey sales increase

what does a GDP deflator of 150 mean?

50% inflation occurred since the base year

most popular measure of inflation

CPI

weakness of GDP Deflator

calculated by using GDP; does not include imported goods

three measures of inflation

consumer price index (CPI), GDP deflator, and producer price index (PPI)

building permits

early warning of economy if building increases or decreases

what happens to inflation measures as PPI increases? Why?

foreshadows increase in other measures of inflation; raw materials/input prices increase and product prices will consequently increase as well

leading indicator

group of data that tells where the economy will be in 6-9 months

what is currently the most weighted item in CPI?

housing

weakness of CPI- quality changes

if price increases in a good because the quality has increased, it looks inflationary on the CPI

GDP Deflator of 100

means that 0% inflation occurred during the year in question

Producer Price Index (PPI)

measures the price change of goods commonly purchased by businesses (raw materials)

weakness that CPI uses only retail prices

no sales; does not consider the sale prices of items

GDP Deflator

nominal GDP/Real GDP x 100 = 100; measures goods and services actually produced

average hourly work week

precursor to cyclical unemployment

inventories

stack up, people are not buying products as fast

stock market

stock market increases, businesses make money

weaknesses of CPI

substitution bias, uses only retail prices, quality changes, introduction of new products

weakness of CPI- introduction of new products

takes a longer time for the CPI to recognize; not originally in the CPI


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