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Lecture 8

# Econ 105 Lecture 8 Jan 31st.doc

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School
Department
Economics
Course
ECON 105
Professor
Brian Krauth
Semester
Winter

Description
Econ 105 Lecture 8 Jan 31st Chapter 6, The price level and the inflation rate -\$1 buys less than it did 20 years ago. We observe a general rise in prices (inflation), but not all prices rise at the same rate. -Some goods go up, some stay where they are, and some even go down. We would like to have a single number (a price index) that measures typical prices. We have 2 main price indices: 1) GDP deflator: weighs by production, in current year. 2) CPI: weighs by a fixed market basket that represents typical household purchases. (doesn't have units) Ex: 2010 = base year ******see notebook for table****** ( 1 ) CPI(2010) = (cost of basket in current year) / (cost of basket in base year) x 100 = ((10 x 3) + (1.5 x 70)) / ((10 x 3) + (1.5 x 70)) x 100 = 135 / 135 x 100 = 100 CPI(2011) = ((10 x 4) + (1.5 x 100)) / ((10 x 3) + (1.5 x 70)) x 100 = 190 / 135 x 100 = 140 Inflation rate = growth rate of price index. Inflation (by GDP deflator) = (140 - 100) / 100 x 100% = 40% Inflation (by CPI) = (141 - 100) / 100 x 100% = 41% We also have a few other price indices: 1) Regional CPI 2) CPI for specific categories of goods 3) Core CPI What we use the CPI for: 1) To compare dollar amounts across time. 2) As something for policy makers to watch. 3) To index various ******* and government benefits. Limitations of the CPI as a measure of the cost o
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