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Lecture

ECON102 Lecture Notes - Gdp Deflator


Department
Economics
Course Code
ECON102
Professor
Angela Trimarchi

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Econ 102 Chapter 6 Notes Prof: Angela Trimarchi
Chapter 6: Measuring the Cost of Living
Inflation : A rise in the overall level of prices
Deflation : A fall in the overall level of prices
Disinflation : A decrease in the rate of inflation

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Econ 102 Chapter 6 Notes Prof: Angela Trimarchi
4 steps to constructing a price index:
1. Fix the Basket
2. Find the Prices
3. Compute the Basket’s Cost
4. Choose a Base Year and Compute the Index
Compute the Inflation Rate
Calculation of a Price Index
Consumer Price Index =
Cost of a fixed basket in current year * 100%
Cost of a fixed basket in base year
Macroland example:
1990 1991
Quantity Price Quantity Price
Milk (bags) 160 $1.10 150 $1.20
Compact Discs (#) 5 $15.00 10 $16.00
Cost of basket in base year (1990):
= Pmilk1990 (Qmilk1990) + PCD1990(QCD1990)
= $1.10(160) + $15.00(5)
= $251
Cost of basket in the current year (1991):
= Pmilk1991 (Qmilk1990) + PCD1991 (QCD1990)
= $1.20(160) + $16.00(5)
= $272
CPI1991
= $272 * 100
$251
= 108.37%
Question One:
If the CPI in Year 1 is 125 and the CPI in year 2 is 150, calculate the
inflation rate.
Answer:
20% - Measured by the percent change in the CPI
Formula for Percentage Change:
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