ECON1010 Lecture Notes - Lecture 3: The Automatic, Gdp Deflator, Real Interest Rate
Lecture 3
MEASURING THE COST OF LIVING
ā¢ Inflation ī¾CPIīæ refers to a situatioī
¶ iī
¶ īhich the ecoī
¶oī
µyās oīerall price leīel is risiī
¶g.
ā¢ The inflation rate is the percentage change in the price level from the previous period.
THE CONSUMER PRICE INDEX
ā¢ The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a
typical consumer.
o Overall cost of living
ā¢ The Australian Bureau of Statistics reports the CPI each month.
ā¢ The CPI is used to monitor changes in the cost of living over time.
ā¢ When the CPI rises, the typical family has to spend more dollars to maintain the same standard of
living.
HOW THE CPI IS CALCULTED IN 5 STEPS
1. Fix the basket.
o Determine which prices are most important to the typical consumer.
o The Australian Bureau of Statistics (ABS) identifies a market basket of goods and services the
typical consumer buys.
o The ABS conducts regular consumer surveys to determine what they buy and how much they
pay.
2. Find the prices. Find the prices of each of the goods and services in the basket for each point in time
3. Calīulate the īasketās īost. Use the data on prices to calculate the cost of the basket of goods and
services at different times.
4. Choose a base year and compute the index:
o Designate one year as the base year, making it the benchmark against which other years are
compared.
o Compute the index by dividing the price of the basket in one year by the price in the base
year and multiplying by 100.
5. Compute inflation Rate
- The inflation rate is the percentage change in the price index from the preceding period
o Calculated as followed
**example back of tut 3 week 4 worksheet
CPI VS INFLATION RATE
CPI ā CONSUMER PRICE INDEX
INFLATION
= Price of basket of goods/price of basket of goods
(in base year) x 100
(year 2)
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Document Summary
Inflation (cid:894)cpi(cid:895) refers to a situatio(cid:374) i(cid:374) (cid:449)hich the eco(cid:374)o(cid:373)y"s o(cid:448)erall price le(cid:448)el is risi(cid:374)g: the inflation rate is the percentage change in the price level from the previous period. The consumer price index (cpi) is a measure of the overall cost of the goods and services bought by a typical consumer: overall cost of living. The australian bureau of statistics reports the cpi each month. The cpi is used to monitor changes in the cost of living over time: when the cpi rises, the typical family has to spend more dollars to maintain the same standard of living. Find the prices of each of the goods and services in the basket for each point in time: cal(cid:272)ulate the (cid:271)asket"s (cid:272)ost. The inflation rate is the percentage change in the price index from the preceding period: calculated as followed. **example back of tut 3 week 4 worksheet.
