EC 111 chapter 11 lecture notes
EC 111 chapter 11 lecture notes EC 111
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This 1 page Class Notes was uploaded by Conner Jones on Wednesday February 24, 2016. The Class Notes belongs to EC 111 at University of Alabama - Tuscaloosa taught by Zirlott in Spring 2015. Since its upload, it has received 43 views. For similar materials see Principles of Macroeconomics in Economcs at University of Alabama - Tuscaloosa.
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Date Created: 02/24/16
Chapter 11 CPI (consumer price index)- measures typical consumer’s cost of living how is CPI calculated? o Fix the “basket”- the BLS (bureau of labor statistics) surveys consumers to determine what is in the typical consumer’s “shopping basket” o Find the price- BLS collects data on pries of all goods in basket o Compute basket’s cost- use the prices to compute total cost of everything in the basket o Choose a base year and compute index- cost of basket in current year/cost of basket in base year X 100 o Compute inflation rate- (CPI this year – CPI last year)/CPI last year X 100 Problems with CPI o Over time some prices rise faster than others o Consumers substitute toward goods that become cheaper over time o CPI misses this substitution because it uses a fixed basket of goods o Therefore, the CPI overstates increase in cost of living Comparing CPI and GDP deflator o Both measure inflation o Imports- included in CPI and not GDP deflator o Capital goods- included in GDP deflator and not CPI o CPI uses a fixed basket while GDP deflator uses a basket of currently produced goods and services Correcting variables for inflation Inflation o Minimum wage was $1.15 in 1964 and $7.25 in 2015 o CPI today – 220.3, CPI in 1964 – 31.3 o Amount in today’s dollars = amt. in year T Dollars X (price level today/price level in year T) o $1.15 X (220.3/31.3) = $8.08 o minimum wage in 1964 had more spending power than the minimum wage does now indexation – when a dollar amount is changed due to inflation and is automatically corrected by law or contract real v. nominal interest rate o real interest rate is adjusted for inflation, nominal is not o real interest rate = nominal interest rate – inflation rate o example: deposit $1000 for one year, nominal interest rate is 9%, during that year inflation rate is 3.5% real inflation rate = 9% - 3.5% = 5.5%
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