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2.4 Ci

2.4 Ci. How to measure inflation B & D pages 225 – 229. If Inflation refers to the economy’s overall price level rising, how do we find that price level?

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2.4 Ci

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  1. 2.4 Ci How to measure inflation B & D pages 225 – 229

  2. If Inflation refers to the economy’s overall price level rising, how do we find that price level? The consumer price index(CPI) is a measure of the overall prices of a “basket” of goods and services bought by a typical consumer. Yet we must “weight” the prices according to the total spending for each product that households typically spend in a year. The result of weighting yields not a price, but an index - the consumer price index(CPI). How to measure inflation?

  3. Housing Food/Beverages Transportation Medical Care Apparel Recreation Other Education and communication What’s in the CPI’s Basket of over 700 items? To what degree is this typical? 5% 5% 6% 5% 6% 40% 17% 16%

  4. Components Weight (%) Dec-03/Dec-02 Food 17.21 +0.2 Housing 19.63 +6.6 Household Operation 15.35 +1.5 Apparel 4.69 -1.1 Transportation 16.90 -3.9 Tobacco/alcohol 8.72 +2.9 Personal services 8.37 +2.4 Recreation/education 8.56 +1.6 Credit 0.58 +1.2 CPI 100.00 +1.6 Consumer Price IndexWeights and recent price changes

  5. The Inflation Rate The inflation rateis calculated as follows:

  6. Since its based on an average of spending it is unlikely to be the actual rate for individuals. Limitations of the CPI • The CPI is reviewed every three to five years and is unlikely to match current expenditure I.e. new products, products that change. • Is difficult to allow for changes in Quality of goods over time. • There will be discrepancies due to international differences and may not be comparable. • There may not be reliable information on some goods e.g. Second hand products.

  7. The GDP Deflator versus the Consumer Price Index • The GDP deflator reflects the prices of all goods and services produced domestically - currently, whereas... • …the consumer price index reflects the prices of all goods and services bought by consumers - of the same basket in base year.

  8. CPI GDP deflator Two Measures of Inflation Percent per Year 15 10 5 0 2000 1965 1970 1975 1980 1985 1990 1995

  9. Here are 3 Alternative measures of inflation:what would be the impact for each of these price levels rising? PPI: the Producers Price Index, measuring changes in a basket of Goods and services for Producers e.g. resource costs CGPI: Capital Goods Price Index: Measures changes in the price of capital assets bought e.g. office equipment FEPI: Farm Expenses Price index: measures the changes in expenses on the farm e.g. fertiliser cost

  10. The Most Popular Movies of All Time, Inflation Adjusted

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