ECON 204 Lecture Notes - Lecture 12: Investment Goods, Nominal Interest Rate, Real Interest Rate
Document Summary
The price index is a measurement of average prices relative to a base year a. Construct a market basket that shows typical purchases weighted by their fraction of total purchases b. Calculate the cost of the market basket i. Cmb = spending on each good*weight of each good in basket. Price index in year x = (cmb in year x / cmb in base year) x 100. Nb: price index in base year always = 100 c. d. The most common price index is the consumer price index or cpi, which uses a market basket of. Inflation (or deflation) is measured as % cpi i. ii. Example: cpi1 = 125 & cpi2 = 130 a. Inflation between years 1 & 2 is (130 125) / 125 = 0. 04 = 4% Cpi measurement problems: market basket used to compute cpi. Consumers substitute away from goods with rising prices, reducing their inflationary impact.
