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AP Economics

AP Economics. Mr. Bernstein Module 15: The Measurement and Calculation of Inflation February 1 1, 2014. AP Economics Mr. Bernstein. Measurement and Calculation of Inflation Objectives - Understand each of the following: How the inflation rate is measured

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AP Economics

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  1. AP Economics Mr. Bernstein Module 15: The Measurement and Calculation of Inflation February 11, 2014

  2. AP EconomicsMr. Bernstein Measurement and Calculation of Inflation • Objectives - Understand each of the following: • How the inflation rate is measured • What a price index is and how it is calculated • The importance of the Consumer Price Index and other price indexes

  3. AP EconomicsMr. Bernstein Price Indexes and the Aggregate Price Level • Market Basket is made up of typical goods and services purchased • Measuring broad level of inflation, not individual goods and services

  4. AP EconomicsMr. Bernstein Market Baskets and Price Indexes • Price index in a given year = (cost of the market basket in year t)/(cost of the market basket in the base year) • Inflation rate = percentage change between any two values of the index, ie (CPI2013 - CPI2012)/ CPI2012 • Note: Index value in base year = 100

  5. AP EconomicsMr. Bernstein Example: The Deli Index • 2012 cost = (300*4)+(200*5)+(100*2)+(500*3)=3900 • 2013 cost = (300*6)+(200*7)+(100*1.5)+(500*2.5)=4600 • DPI (Deli Price Index) increased (4600/3900)-1 = ~18% even though 2 items actually declined in price

  6. AP EconomicsMr. Bernstein Consumer Price Index (CPI) • Computed monthly using a market basket of ~80,000 goods and services consumed by a typical urban family • Most widely used measure of inflation • Producer Price Index (PPI) measures inflation in inputs used by businesses rather than final products • GDP Deflator (Ratio of Nominal GDP to Real GDP) often used in same way, although technically its not an index. • Note: Base year for GDP is currently 2000

  7. AP EconomicsMr. Bernstein Coincidence of Inflation Measures

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