ECON 1BB3 Lecture Notes - Savings Account, Gdp Deflator, Pension

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Should I spend my money now, or save it for a rainy
day? 10/3/2012 9:27:00 AM
Using CPI
Ex. your father earned 40,000 in 1982. What is this salary worth in 2012
dollars?
CPI (1982)- 61.8
CPI (2012)- 116.3
ANSWER: 61.8 = 40,000
116.3 x
x= 116.3 x 40,000=75,275
61.8
indexing- OAS(old age security) + CPP (Canadian pension plan)
both transfer payments.
Indexing means that it would go up as the inflation goes up.
Problems with CPI:
3 problems with cpi…
1. Substitution bias- ignores consumer substitution; overstates
inflation.
2. Introduction of new goods- CPI is based on a fixed basket of
goods and services; overstates inflation.
3. Unmeasured Quality change- some price changes reflect quality
improvements; overstates inflation
CPI vs GDP Deflator-
1. CPI- goods and services bought by typical consumers
GDP deflator- reflects prices of all goods and services domestically
2. CPI- price change, quantities stay fixed
GDP deflator- quantities change, prices stay fixed (A/B CPI= [cost
of basket in the current year / cost of the basket in the base year ]
times 100) (GDP DEFLAT- nom GDP / real gdp x100
Interest rates:
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Document Summary

61. 8 indexing- oas(old age security) + cpp (canadian pension plan) both transfer payments. Indexing means that it would go up as the inflation goes up. Introduction of new goods- cpi is based on a fixed basket of goods and services; overstates inflation. Unmeasured quality change- some price changes reflect quality improvements; overstates inflation. Cpi- goods and services bought by typical consumers. Gdp deflator- reflects prices of all goods and services domestically. Gdp deflator- quantities change, prices stay fixed (a/b cpi= [cost of basket in the current year / cost of the basket in the base year ] times 100) (gdp deflat- nom gdp / real gdp x100. Ex. you have decided not to buy a pair of shoes that cost 100$ and instead put the 100$ into a savings account earning 5% intrest/year. Nominal interest rate: interest rate without correction for inflation- measures the increase n the number of dollars in your bank account.

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