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    Chapter No 24 Macro Economics

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    ehsanzehri123

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    Chapter No 24 Macro Economics

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    ehsanzehri123
    8 views7 pages

    Original Title

    Chapter No 24 macro economics

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    8 views7 pages

    Chapter No 24 Macro Economics

    Uploaded by

    ehsanzehri123

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 7

    Chapter no 24:

    Define CPI:
    A measure of the overall cost of the goods and
    services bought by a typical consumer is Consumer
    Price index.
     Consumer price index is used to monitor
    changes in the cost of living over time. When
    the consumer price index rises the typical family
    has to spend more money to maintain the same
    standard of living.
     CPI can be calculated by bureau of Labor
    Statistics(BLS) .
     CPI of base year is always 100 or 1.

    Define Inflation Rate:


    Is The percentage change in the price level
    from the previous period.
     Inflation rate can be calculated by CPI and GDP
    deflator.
     Compute inflation rate.
    Inflation rate in year 2 =CPI in year 2- CPI in year
    1/CPI in year 1
    ×100
     No Inflation rate for base year .

    How the CPI is calculated:


    When BLS calculate the consumer price index and
    inflation rate it uses data on the price of thousand
    goods and services.
    1.fix the basket:
    The fixed goods and services.
    2.Find the prices:
    Find the price of each goods and services in
    the basket at each point in time.
    3.Compute the basket cost:
    Basket cost can be calculated by multiplying
    prices and quantity of goods. See page no 507
    table no 1.
    4. choose a base year and compute the index:
    Select one year is a base year.
    The index can be calculated by
    CPI = Price of basket of goods and services in
    current year/price of basket in base year ×100

    Producer Price Index:


    A measure of the cost of a basket of goods and
    services bought by firms.
     PPI can be calculated by bureau of labor
    statistics.

    Problems in measuring the cost of living:


    There are Problems in measuring the cost of
    living.
    1. Substitution Bias:
    If our price index is computed assuming a
    fixed basket of goods, it ignores the possibility
    of consumer substitution and therefore was
    stated the increase in the cost of living from
    one year to the next. Example is in the page no
    509.

    2. Introduction of new Goods:


    If a New good is introduced it can not be
    considered by CPI.
    3.Unmeasured Quality Change:

    Difference b/w GDP Deflator and CPI:


     GDP deflator considered the prices of all
    currently produce goods but CPI considered
    only the price of the good in the basket.
     GDP deflator consider the price of
    domestically produced goods where is CPI
    consider the price of all those good which
    are in the basket, whether they
    domestically produced or imported.
     CPI uses fixed weight where as GDP deflator
    considered a variable weight.

    Correcting economic variables for the effect of


    inflation:
    Dollar figures from different times:

    Amount in today’s dollars is equal to the


    amount of RS. In Previous period x price level
    (Consumer price index) today ÷ divide to the
    price level in year T.

    Indexation:
    The adjustment in the value automatically by a
    contract to offset the impact of the inflation.
     Indexation means adjusting a price, wage,
    or other value based on the changes in
    another price or composite indicator of
    prices.
     Indexation can be done to adjust for the
    effects of inflation, cost of living, or input
    prices over time, or to adjust for different
    prices and costs in different geographic
    areas.
     Indexation is often used to escalate wages
    in inflationary environments where failure
    to negotiate regular wage increases would
    lead to ongoing real wage cuts for worker

    Real and Nominal interest Rates:


    When we want to save $1000 in bank. It will
    give a 100 dollars in interest . annually after
    he get 1100 overall.
    Zero inflation:
    There will be a increase in purchasing power.
     Increase in inflation will decrease the
    purchasing power and there will be a
    deflation.

    Purchasing power:
    The amount of good and services she can buy
    Nominal interest rate:
    The interest rate that measures the change in
    dollar amount is called nominal interest rate.
    Real interest rate:
    Interest rate corrected for inflation is called real
    interest rate.
     Real interest rate is equal to nominal
    interest rate minus inflation rate.

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