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ECON 201 Lecture Notes - Lecture 7: Price Level, Market Basket, Gdp Deflator

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erinsea-lion256
19 Jan 2017
School
UW
Department
Economics
Course
ECON 201
Professor
Daisoon Kim

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Document Summary

Econ 201 lecture 7 cpi & other measures. Aggregate price level is a measure of the overall level of prices in the economy. Price index is the ratio of the current cost of that basket to the cost in a base year, times 100. Price index in a given year = (cid:3030)(cid:3042)(cid:3046)(cid:3047) (cid:3042)(cid:3033) (cid:3040)(cid:3028)(cid:3045)(cid:3032)(cid:3047) (cid:3029)(cid:3028)(cid:3046)(cid:3032)(cid:3047) (cid:3041) (cid:3034)(cid:3049)(cid:3032)(cid:3041) (cid:3052)(cid:3032)(cid:3028)(cid:3045) Inflation rate = (cid:3041)(cid:3031)(cid:3032)(cid:3051) (cid:3041) (cid:3034)(cid:3049)(cid:3032)(cid:3041) (cid:3052)(cid:3032)(cid:3028)(cid:3045) (cid:3041)(cid:3031)(cid:3032)(cid:3051) (cid:3041) (cid:3043)(cid:3045)(cid:3032)(cid:3049)(cid:3042)(cid:3048)(cid:3046) (cid:3052)(cid:3032)(cid:3028)(cid:3045) (cid:3030)(cid:3042)(cid:3046)(cid:3047) (cid:3042)(cid:3033) (cid:3040)(cid:3028)(cid:3045)(cid:3032)(cid:3047) (cid:3029)(cid:3028)(cid:3046)(cid:3032)(cid:3047) (cid:3041) (cid:3029)(cid:3028)(cid:3046)(cid:3032) (cid:3052)(cid:3032)(cid:3028)(cid:3045) (cid:883)(cid:882)(cid:882) (cid:3041)(cid:3031)(cid:3032)(cid:3051) (cid:3041) (cid:3043)(cid:3045)(cid:3032)(cid:3049)(cid:3042)(cid:3048)(cid:3046) (cid:3052)(cid:3032)(cid:3028)(cid:3045) Directly impacts millions of americans: payments are tied to or indexed to cpi. Amount paid rises or falls when cpi rises or falls. What happens when a good in the cpi basket undergoes unaccounted for quality improvements: a: inflation will be overestimated. Gdp deflator: measures the price level by calculating the ratio of nominal gdp to real. Gdp: gdp deflator for a given year is 100 times the ratio of nominal gdp to real.

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Related Questions

Which of the following statements is true about the consumer price index (cpi):

A.It measures cost of representative basket of goods at the level of first significant commercial transaction

B.It measure of the average prices paid by consumers for all goods and services

C.It is used to measure the standard of living in an economy

D.It measures the average prices paid by consumers for a fixed basket of goods services

E. None of the above

 

 

I ONLY NEED AN OUTLINE IF IT IS DETAILED AND TELLS ME WHAT TO DO/WRITE IN EACH PARAGRAPH.


The federal government currently uses the traditional consumer price index (CPI) to adjust social security benefits, other federal programs and the tax code for inflation. In an attempt to reach a compromise on a national budget, President Obama has recently proposed an alternative method for calculating cost-of-living adjustments that relies on the chained consumer price index. Thus far, the proposed change has received mixed reviews among politicians and economists; therefore, it is worth your time and effort to explore the issue in depth to formulate your own opinion. Using your understanding of economic inquiry, address the following questions in a 2-3 page paper:


  1. What is the difference between the CPI and chained CPI? What would be the budgetary effects of using the chained CPI to make cost-of-living adjustments in federal programs and the tax code? What impact would these changes have on the national debt?

  2. Apply the aggregate demand/aggregate supply framework to predict how such a change could potentially impact the economy in the short-run. Evaluate the long-run impacts of the change.

  3. Do you think Congress and the President should support a switch to the chained CPI? Be sure to support your opinion.


You should begin your research by reading the April 18, 2013 testimony of Jeffrey Kling of the Congressional Budget Office on the impacts of using the chained CPI to index for inflation (http://www.cbo.gov/sites/default/files/cbofiles/attachments/44083_ChainedCPI.pdf). In addition to this report, you should cited two additional outside sources in your paper and create a separate works cited page. You may cite material from your textbook; however, it will not be counted as an outside source.


Measures of Inflation The GDP deflator is the broadest, most inclusive measure of change in the country's price level since it includes all final goods and services produced and sold. But the GDP deflator is not used by the government or economists as the benchmark measure of inflation; instead, the consumer price index (CPI) is used to determine changes in the cost of living. What is the shortcoming of the GDP deflator as a measure of inflation for households, and why is the CPI considered to be a more useful measure?