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ECN 222 10/1 - 10/6

by: Jennifer Su

ECN 222 10/1 - 10/6 ECN 222 - 001

Jennifer Su
GPA 4.0
Principles of Economics-Macro
Adam Talbot Jones

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About this Document

Descriptive notes for days 10/1 and 10/6, Hope you guys enjoy :)! Feel free to email me at with any questions, criticisms, or comments.
Principles of Economics-Macro
Adam Talbot Jones
Class Notes
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This 7 page Class Notes was uploaded by Jennifer Su on Tuesday October 6, 2015. The Class Notes belongs to ECN 222 - 001 at University of North Carolina - Wilmington taught by Adam Talbot Jones in Summer 2015. Since its upload, it has received 65 views. For similar materials see Principles of Economics-Macro in Economcs at University of North Carolina - Wilmington.

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Date Created: 10/06/15
12TH 339 OF MaCl OECOI lOmICS lOl Class began with discussion about study abroad options Jones said that over the period of this month people will be coming into elaborate about study abroad options Reminders Exam Retakes Tomorrow 12 pm CH 210 Monday 8pm CH 133 Tonight Alpia Assignment about GDP DUE TONIGHT BBT Lecture for an extra 3 pts on exam you can still earn the extra 3 pts even if you ve got a 100 on the test The lecture is at CH 105 530pm We divided the room into thirds and one person from each third bought a coke We named the classroom thirds m 3 Deposit irate Withdre In ation Net Ri w m Leftistan 025 025 8 027 0 002 8 The Dub 025 025 8 027 8 000 0 NiShaland 025 025 8 027 16 002 8 From this we can gleam that normal rate in ation rate real rate Review GDP includes goods made in US GDP de ator is a measure of prices GDP de ator doesn t measure just consumer goods It measures other things like elevators or 18wheelers things that people don t buy often Chapter Objectives What is the consumer price index CPI What are problems with the CPI How does CPI differ from the GDP de ator How can we use the CPI to compare dollar amounts from different years The Consumer Price Index CPI measures the typical consumer s cost of living basis of cost of living adjustments COLAS in many contracts and in social security What is a COLA Back then social security was meant to be given to people who lived past life expectancy This was done basically so the elderly don t die in the streets More people than expected used this fund so the government adjusts the fund for in ation to make sure that there is no unnecessary spending COLA is a guideline for adjusting social security payments CPI vs GDP Gross Domestic Product Measures quantity of goods and services produced Real GDP holds prices constant base year to isolate change in output Consumer Price Index Measures change in price of goods and services purchased by typical household CPI holds quantities constant to isolate the change in price How the CPI is calculated 5 steps 1 Fix the basket The Bureau of Labor Statistics BLS surveys consumers to determine what s in the typical consumer s shopping basket Shopping basket rent medical insurance food entertainment etc 2 Find the prices The BLS collects data on the prices of all the goods in the basket 3 Compute the basket s cost Use prices to compute the total cost of the basket 4 Choose a base year and compute the index 100 X cost of basket current year cost of basket base year 5 Compute the in ation rate The percentage change in the CPI from the preceding year in ation CPI this year CPI last year x 100 CPI last year Watch clip on CPI from 2007 on News Hour PBS show Notes from Clip 25000 places visited to make CPI 80000 goods included in CPI What s in the CPI s basket Housing 43 Transportation 13 Food and Beverage 15 Medical Care 6 Recreation 6 Education and Communication 6 Apparel 4 Other 3 Headline vs Core In ation Headline In ation based on CPI in ation with all the prices included Core In ation based on CPI in ation with all items EXCEPT food and energy Core in ation is a less volatile measurement than headline in ation 13TH Day OF macroeco omlcs lOES Announcements gt 800 AM tomorrow CH210 last test retake No Alpia assignment due this Thursday gt Alpia assignment due next Thursday 1015 Review How to Determine CPI gtH01d quantity fixed to measure change in price gtFiX the basket gtFind the prices gtCalculate the basket cost gtCPI Current total basket cost Base year basket cost X 100 gtIn ati0n 100 X new CPI 01d CPI01d CPI Example Basket 4 pizzas 10 lattes Year Price of Pizza Price of Latte Basket Cost 2010 10 2 Basket2010 4 X 10 10 x 2 60 2011 11 250 Basket2011 4 X 11 10 X 250 69 2012 12 3 Basket2012 4 X 12 10 X 3 78 CPI current costbase year cost X 100 What is the CPI for 2010 2011 and 2012 using 2010 as a base year CPI2010 6060 X 100 100 CPI2011 6960 X 100 115 0312012 7860 x 100 130 In ation from 2010 to 2011 100 X 115 100100 15 In ation from 2011 to 2012 100 X 130 115115 13 CPI Example Basket 2 10 lbs beef 20 lbs chicken Year Price of Beef Price of Chicken Basket Cost 2010 4 4 120 2011 5 5 150 2012 9 6 2 10 0312010 100 0312011 125 c1312012 175 In ation from 2010 to 2011 25 In ation from 2011 to 2012 40 Example for Substitution Bias Using the chart above Since prices raised for beefin 2012 people buy 5 lb beef 25 lb chicken in just 2012 Basket cost of2012 5 X 9 X 25 X 6 195 Household s actual expenditures year 2011 150 from previous problem year 2012 195 In ation We can use regular basket cost to determine in ation instead of CPI because the percentages are the same In ation 2011 to 2012 195 150150 X 100 30 Because the price changed in 2012 people s purchases will change People will buy less of an item if the price increases CPI is inaccurate because it assumes everyone buys the same amount of items each year Actual CPI 30 lt Projected CPI 40 Three Problems w CPI caused by fixed basket CI Substitution Bias CI consumers substitute toward relatively cheaper goods CI Introduction of new goods CI increases variety consumers find products that closely meets their needs ex no longer buying palm pilots b c iphones have those functions CI Unmeasured quality change CI Cars last longer fridges last longer CI Improvements in goods more for your dollar Because of these problems the CPI overstates the cost of living 0 each of these problems causes the CPI to overstate cost of living increases 0 the BLS has made technical adjustments but the CPI probably still overstates in ation by 05 per year about 0 This is important b c social security payments and many contracts have COLAs tied to the CPI CPI vs GDP de ator Imported consumer goods 0 included in CPI C excluded Capital goods 1 elevators conveyor belts fork lifts things the avg consumer does not buy C excluded from CPI C Included in GDP de ator if produced domestically The Basket C CPI uses fixed basket 0 GDP de ator uses basket of currently produced goods and services This matters if different prices for goods are changing by different amounts In each scenario determine what s affected 0 Starbucks raises the price of Frapps CPI and GDP rise 0 Caterpillar raises the price of the industrial tractors it manufactures at its Illinois factory CPI stays the same GDP rises C Armani raises the price of the Ilian jeans it sells in the US CPI increases GDP stays at b c they weren t made in the US


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