Inflation
Objectives:
How is inflation measured
The calculation and limitations of these indices
The effects of inflation
Important points to remember:
Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. GDP Deflator- measures price changes in current year compared to those in a base year, for all goods and services produced within the country and is used to convert nominal GDP to real GDP or GDP at constant prices.
HOW IS INFLATION MEASURED
Inflation is measured through two indexes, each of which represents of a group of prices. One index measures how pricing is affecting consumers, or buyers. The other index measures how pricing is affecting producers, or suppliers and vendors.
Calculating Inflation Using CPI (Consumer Price Index)
The simplest and most common method of calculating inflation is to calculate the percentage change in the CPI from one year to the next. The CPI is calculated using a fixed basket of goods and services; the percentage change in the CPI therefore tells how much more or less expensive the fixed basket of goods and services in the CPI is from one year to the next. The percentage change in the CPI is also known as the percentage change in the price level or as the inflation rate.
Fortunately, once the CPI has been calculated, the percentage change in the price level is very easy to find. Let us look at the following example of "Country B."
Figure %: Goods and Services Consumed in Country B
For example, let's compute the CPI for Country B. In this simplified example, consumers in Country B only purchase bananas and backrubs (lucky fools). The first step is to fix the basket of goods. The typical consumer in Country B purchases 5 bananas and 2 backrubs in a given period of time, so our fixed basket is 5 bananas and 2 backrubs. The second step is to find the prices of these
How is inflation measured
The calculation and limitations of these indices
The effects of inflation
Important points to remember:
Consumer Price Index (CPI) - A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. GDP Deflator- measures price changes in current year compared to those in a base year, for all goods and services produced within the country and is used to convert nominal GDP to real GDP or GDP at constant prices.
HOW IS INFLATION MEASURED
Inflation is measured through two indexes, each of which represents of a group of prices. One index measures how pricing is affecting consumers, or buyers. The other index measures how pricing is affecting producers, or suppliers and vendors.
Calculating Inflation Using CPI (Consumer Price Index)
The simplest and most common method of calculating inflation is to calculate the percentage change in the CPI from one year to the next. The CPI is calculated using a fixed basket of goods and services; the percentage change in the CPI therefore tells how much more or less expensive the fixed basket of goods and services in the CPI is from one year to the next. The percentage change in the CPI is also known as the percentage change in the price level or as the inflation rate.
Fortunately, once the CPI has been calculated, the percentage change in the price level is very easy to find. Let us look at the following example of "Country B."
Figure %: Goods and Services Consumed in Country B
For example, let's compute the CPI for Country B. In this simplified example, consumers in Country B only purchase bananas and backrubs (lucky fools). The first step is to fix the basket of goods. The typical consumer in Country B purchases 5 bananas and 2 backrubs in a given period of time, so our fixed basket is 5 bananas and 2 backrubs. The second step is to find the prices of these