Economics

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Notebook #20 Economics 13-2

GDP and Changes in the Price Level pages 350-354

GDP and Changes in the Price LevelESSENTIAL QUESTION: Why is a market basket used whenever a price index is constructed?

What is the Consumer Price Index (CPI) and why is it used?

What are the limitations of the use of GDP as a measurement tool? pages 350-354

GDP and Changes in the Price Level pages 350-354

GPS STANDARDS:

SSEMA1- Describe the means by which economic activity is measured.

b.) Define Consumer Price Index

GDP and Changes in the Price Level

Most people do not know that the government works to collect and process data about price changes.

Inflation is a rise in the general price level.

It is important to track inflation because it distorts the economic statistics that we keep.

Constructing a Price Index

A price index is used to measure changes in prices over time.

A price index is created by selecting a base year and a representative market basket of goods.

It is important to track inflation because it distorts the economic statistics that we keep.

Constructing a Price Index

What do price indices show?

The change in price relative to a base year.

Constructing a Price Index

Figure 13.5Constructing the Consumer Price Index

The Consumer Price Index (CPI)

The consumer price index (CPI) reports changes in the prices of 80,000 consumer goods and services.

The producer price index (PPI) reports changes in prices received by domestic producers for 3,000 commodities.

Constructing a Price Index

Figure 13.5Constructing the Consumer Price Index

The Consumer Price Index (CPI)

Why are price indices broken down into subcategories?

To give consumers and businesses a better idea of how prices in a particular business or industry have changed.

Real vs. Current GDP Real GDP is calculated by dividing current GDP by the implicit GDP price deflator and multiplying by 100.

The government has to calculate real GDP because it knows that the current GDP reflects inflation.

Converting current GDP into real GDP is useful for comparing over time because it adjusts for inflation.

Real vs. Current GDP Why is it desirable to compare real GDP figures rather than current dollar figures?

As I said, Current dollar figures reflect inflation.

Only by comparing real GDP can real changes in economic growth be identified.

Real vs. Current GDP Why is a market basket is used whenever a price index is constructed?

It is constructed to be representative of real purchases of goods and services all over the country.

The Consumer Price Index (CPI)

Suppose you were told that you would earn $60,000 a year in 2015. Explain why this information would tell you little about the standard of living you might enjoy. What other information would you need to have before you could evaluate how well you might live in 2015?

If you knew what the consumer price index was in relation to the base period you would have a better idea about how much $60,000 would buy in 2015 vs. right now in 2009.

Pages 350-354