EC140 Lecture Notes - Lecture 2: Lectionary, Price Level, Real Wages

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EC140 Lecture Notes - Lecture 1: Lectionary

EC140 Lecture Notes - Lecture 2: Lectionary, Price Level, Real Wages

EC140 Lecture 3: Lecture 3 - January 14, 2019

Document Summary

Percent change in real income from previous year. The deflator is our first example of a price index. It represents the average price level of a group of good. The deflator price index the ratio of nominal national income of real national income multiplied by 100 is one of many price indexes in an economy. A price index represents how average prices have changed for the goods in the price index between the base year of the price index and the current year. The value of a price index also called the price level. Inflation is the percentage change in the value of the price level nearly always per year. The interpretation of the change in prices from year a to year b is: inflation. The interpretation of the change in prices from year b to year c is: deflation.

Related Questions

The table below lists annual consumer price index and inflation rates for a country over the period 2005-2010. Assume the year 2005 is used as the base year.

Year	Consumer Price Index	Inflation Rate
2005	100
2006	115	B
2007	125	C
2008	140	D
2009	A	10%
2010	160	E

8.7%

120

25%

12%

The price index was 170 in the first year, 180 in the second year, and 195 in the third year. The inflation rate was about

5.9 percent between the first and second years, and 8.3 percent between the second and third years.

5.6 percent between the first and second years, and 7.7 percent between the second and third years.

10 percent between the first and second years, and 15 percent between the second and third years.

80 percent between the first and second years, and 95 percent between the second and third years.

0.1 points

QUESTION 17

The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the third year. The economy experienced

		5.0 percent deflation between the first and second years, and 3.0 percent deflation between the second and third years.
		7.5 percent deflation between the first and second years, and 4.3 percent deflation between the second and third years.
		5.3 percent inflation between the first and second years, and 4.1 percent inflation between the second and third years.
		7.5 percent inflation between the first and second years, and 4.3 percent inflation between the second and third years

0.1 points

QUESTION 18

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

The real interest rate is the nominal interest rate minus the rate of inflation.

The real interest rate is the nominal interest rate times the rate of inflation.

The real interest rate is the nominal interest rate plus the rate of inflation.

The real interest rate is the nominal interest rate divided by the rate of inflation.

0.1 points

QUESTION 19

If the nominal interest rate is 6 percent and the rate of inflation is 2 percent, then the real interest rate is

4 percent.

-4 percent.

3 percent.

8 percent.

0.1 points

QUESTION 20

If the nominal interest rate is 7 percent and the real interest rate is -2.5 percent, then the inflation rate is

9.5 percent.

4.5 percent.

-4.5 percent.

-9.5 percent.

. From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010?

0.9%

9.0%

2.5%

90%

If the consumer price index changes from 125 in September to 150 in October, what is the rate of inflation?

20.0%

45.5%

16.7%

9.1%

. Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2013, the basketâs cost was $80; in 2014, the basketâs cost was $86; and in 2015, the basketâs cost was $90. The value of the CPI in 2015 was

104.6 and the inflation rate was 4.6%.

112.5 and the inflation rate was 4.6%.

112.5 and the inflation rate was 12.5%.

104.6 and the inflation rate was 12.5%.

Suppose a basket of goods and services has been selected to calculate the CPI. In 2002, the basketâs cost was $80; in 2008, the basketâs cost was $92; and in 2010, the basketâs cost was $108. The base year must be

The base year cannot be determined from the given information.

2002

2008

one of the years between 2008 and 2010.

Suppose a basket of goods and services has been selected to calculate the CPI and 2012 has been chosen as the base year. In 2012, the basketâs cost was $80.00; in 2013, the basketâs cost was $84; and in 2014, the basketâs cost was $87.60. The value of the CPI was

All of the above are correct.

109.5 in 2014.

105 in 2013.

100 in 2012.

Which of the following is correct?

The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.

The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.

The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.

The GDP deflator is more commonly used as a gauge of inflation than the CPI is.

The inflation rate is defined as the

percentage change in the price level from the previous period.

price level in an economy.

change in the price level from one period to the next.

price level minus the price level from the previous period.

Economists use the term inflation to describe a situation in which

the economy's overall price level is rising.

some prices are rising faster than others.

the economy's overall price level is high, but not necessarily rising.

the economy's overall output of goods and services is rising faster than the economy's overall price level.

In recent years, the BRIC (Brazil, Russia, India and China) countries have received much attention due to their growing importance in the world economy. Now that you are equipped with knowledge about macroeconomic data, you can take a first-hand look at how quickly these countries have been growing, how much inflation they have, and how developed they are when compared to the USA.

	Brazil	Russia	India	China	USA
Nominal GDP in 2013 (local currency, Million)	4,844,815	66,755,300	113,550,735	56,884,521	16,768,100
Nominal GDP in 2000 (local currency, Million)	1,179,482	7,305,600	21,774,127	9,921,455	10,284,800
Price Level in 2013 (index 2010=100)	124.12	121.63	132	111.1	106.8
Price Level in 2000 (index 2010=100)	51.4	30.75	54.2	81	79
Population in 2013 (in Million)	200.4	143.5	1,252	1,357	316.1
Population in 2000 (in Million)	174.5	146.6	1,042	1,263	282.2
Dollar/Local Currency Exchange rate 2013	1/2.4	1/32.6	1/62.18	1/6.07	1
PPP Conversion Factor 2013	1/1.9	1/19.47	1/18.24	1/3.36	1

The PPP conversion factor is the price in US dollars of a basket of goods (chosen by the World Bank) in the USA divided by the price in local currency of a comparable basket in that country.

For each of the BRIC countries and the US, over the period 2000-2013, answer the following:

1.What was the average annual inflation rate?

2.What was the average annual growth rate of population?

3.What was the average annual growth rate of real GDP?

4.What was the average annual growth rate of real GDP per capita?

5.For each of the BRIC countries, in the year 2013, how did real income per capita compare to that in the US? (To make this comparison, report real GDP per capita for each country as a percentage of the US.) Report two answers, one based on market exchange rates and one adjusted for differences in purchasing power.

EC140 Lecture Notes - Lecture 2: Lectionary, Price Level, Real Wages

EC140 Lecture Notes - Lecture 1: Lectionary

EC140 Lecture Notes - Lecture 2: Lectionary, Price Level, Real Wages

EC140 Lecture 3: Lecture 3 - January 14, 2019

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