ECON 200 Lecture Notes - Lecture 31: Gdp Deflator
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ECON 200 Full Course Notes
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Document Summary
Because food and energy prices show substantial short-run volatility, the core cpi better reflects ongoing inflation trends. Producer price index - a measure of the cost of a basket of goods and services bought by firms. Because firms eventually pass on their costs to consumers in the form of higher consumer prices, changes in the ppi are often thought to be useful in predicting changes in the cpi. Cpi tries to gauge how much incomes must rise to maintain a constant standard of living. Problems with cpi 1. substitution bias 2. introduction of new goods 3. unmeasured quality change. Consumers substitute toward goods that have become relatively less expensive. If a price index is computed assuming a fixed basket of goods, it ignores the possibility of consumer substitution and, therefore, overstates the increase in the cost of living from one year to the next.
