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Economics (15)
ECN 211 (11)
Chapter 11

ECN 211 Chapter 11: Chapter 11 Reading Notes
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Department
Economics
Course
ECN 211
Professor
Stefan Ruediger
Semester
Spring

Description
Mankiw Vid: Why Isn't a Newspaper 15 Cents Anymore? • 1974 New York Times was only $0.15 • Inflation- an increase in the overall level of prices in the economy; when prices rise; value of the dollar goes down • Cost of living doubled • We'll learn how the rate of inflation is measured Intro • In 1931 Babe Ruth was paid $80,000 (seen as an extraordinary salary) • In 2012 the median salary for a player on the Yankees is 1.9 million • Consumer price index- turning dollar figures into meaningful measures of purchasing power; used to monitor changes in the cost of living over time • Inflation- economy's overall price level rises • Inflation rate- percentage change in the price level form the previous period Consumer price index • Consumer price index (CPI)- a measure of the overall cost of the goods and services bought by a typical consumer; gauges how much incomes must rise to maintain a constant standard of living; not a perfect measure ◦ A measure of a sample of goods and services, not all of them • Department of Labor -> Bureau of Labor a Statistics (BLS) ◦ They computes and report the CPI • Inflation is not the increase of a specific product ◦ It is the rise of general prices How CPI is Calculated CPI = Inflation Rate in year 2 = • Producer price index (PPI)- a measure of the cost of a basket of goods and services bought by a firm Problems in Measuring the Cost of Living • Substitution bias- consumers respond to prices changes boy buying less of the goods whose prices have risen ◦ Substitute for less expensive goods ◦ CPI ignores the possibility of consumer substitution and only focuses on the fixed basket of goods ‣ Overstates the increase in the cost of living • Introduction of new goods- consumers have more variety to choose from; reduces the cost of maintaining the same level of economic well being ◦ Increase of possible choices makes each dollar more valuable ◦ CPI doesn't reflect the increase in the value of the dollar • Unmeasured quality change- quality of a good deteriorates while the price remains the same then value of a dollar falls; getting a lesser good for the same amount of money; quality of a good rises while the price remains the same then value of a dollar rises ◦ CPI tries to adjust to quality change, but quality is hard to measure GDP Deflator vs. CPI • GDP Deflator- ratio of nominal GDP to real GDP; measure the current level of prices in the base year ◦ Nominal GDP- current output values at current prices ◦ Real GDP- current output valued at base year prices • Similarities ◦ They both gauge how quickly prices are rising • Differences ◦ 1
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