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Understanding Inflation Metrics: CPI, WPI, and Real GDP Impacts

This article provides an overview of various inflation measurement techniques, including the Consumer Price Index (CPI), Wholesale Price Index (WPI), and GDP deflator. It explains how these indices assess price changes affecting urban consumers and derive real GDP. The CPI is particularly scrutinized for its tendency to overestimate inflation due to factors like the substitution effect and changes in product quality. The consequences of these overestimations on poverty rates, cost-of-living adjustments, and tax brackets are discussed, alongside challenges in accurately measuring unemployment rates.

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Understanding Inflation Metrics: CPI, WPI, and Real GDP Impacts

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Presentation Transcript

  1. Measuring Inflation and Prices • Consumer Price Index (CPI)– U and R • GDP Deflator • For deriving “Real GDP” • Wholesale Price Index (WPI) • Producer Price Index (PPI) • Purchases by manufacturers • Purchasing Power Parities • For International Comparisons

  2. Bureau of Labor Statistics:Consumer Price Index (U) • cost of a market basket of goods purchased by a typical urban consumer. • Used to adjust poverty levels, social security benefits, tax rates…. • Overestimates inflation by 1.1 per year

  3. How CPI Overestimates inflation • Substitution effect: • When prices increase, we switch to other items • Changes in Quality of the product • i.e., Computers • New Outlets (Wal Mart) • CPI measures average prices at many outlets, but consumer buy more where the price is cheaper

  4. Consequences of CPI overestimates • Overestimates of Poverty rates • Higher Cost of Living Adjustments to wages and Social Security benefits • Tax Brackets raised higher: Lower Tax Rates

  5. Measuring Unemployment(Bureau of Labor Statistics Monthly Survey)

  6. Calculating Unemployment Rates • Population in Civilian Labor Force:Civilians working or looking for work • Unemployment Rate = % of Labor Force looking for Work

  7. Problems with Unemployment Rate • Housepersons not counted in labor force (LF) • Discouraged workers not counted in LF • Employees on strike are counted Employed • Part time workers looking for Full time work are counted Employed • Armed Services Personnel not counted in LF

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