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ECO102H1 (155)
Lecture

ECO100 - JAN 28 CPI & GDP

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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.
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