Class Notes (835,798)
Economics (1,590)
ECO102H1 (155)
Lecture

# ECO100 - JAN 28 CPI & GDP

3 Pages
97 Views

Department
Economics
Course
ECO102H1
Professor
James Pesando
Semester
Fall

Description
Tutorial number 9 4. Consumer Price Index ● Construction: show the cost of a basket of goods and services relative to the cost of the same basket of goods in the base year ● Consume as opposed to produce ○ GDP deflator is used to measure all goods produced(exports) ■ flexible set of production ■ Output and price change ● Measure price changes - how inflations impacts everyday, consumed(imports) ○ fixed basket of good ● Calculate: CPI = [VoB in current year] / [VoB in Base Year] * 100 ○ VoB = Value of the basket of goods Hot dogs and Hamburgers ● STEP 1: Survey consumers to determine a fixed basket of goods ○ 4 hot dogs, 2 hamburgers ● STEP 2: Find the price of each good in each year ○ Year Price of Hot Dogs Price of Hamburgers Year Price of Hot Dog Price of Hamburger 1 \$1 \$2 2 2 3 ● STEP 3:Compute cost of basket of goods in each year Year of Basket ● 1 (\$1 per hot dog × 4) + (\$2 per hamburger × 2) = \$8 ● 2 (\$2 per hot dog × 4) + (\$3 per hamburger × 2) = \$14 ● STEP 4: Choose one year as a base year (Year 1) and compute CPI in each year. Year Consumer Price Index ● 1 (\$8/\$8) × 100 = 100 ● 2 (\$14/\$8) × 100 = 175 ● STEP 5: Use CPI to compute inflation rate from previous year Year ● 2 (175 - 100)/100 × 100 = 75% Salary Example ● Is a salary of \$50,000 in 2011 worth more or less than a salary of \$45,000 in 2004 ● Normalize the amount of money ● Use CPI to adjust the “cost of money” ● Calculate the equivalent 2011 salary of \$45,000 in 2004 based on purchasing power ○ [2004 salary] * (CPI 2011/CPI 2004) ○ 45,000 * [120.9/105.1] = \$51,765 ■ The base year was 2002 ● Since \$51,765 > \$50,000, the \$45,000 salary in 2004 was able to purchase more than the \$50,000 salary in 2011.
More Less

Related notes for ECO102H1
Me

OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Join to view

OR

By registering, I agree to the Terms and Privacy Policies
Just a few more details

So we can recommend you notes for your school.