Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
26 Cards in this Set
- Front
- Back
|
Definition of Cost of Living
|
the cost of the goods and services that a typical consumer buys in a given time period
|
|
|
Definition of Consumer Price Index (CPI)
|
a measure of the overall cost of goods and services bought by a typical consumer during a particular period
|
|
|
What is the cost of living measured by?
|
CPI
|
|
|
Formula for CPI
|
cost of base year basket of gds and services in yr t. DIVIDED BY: cost of base year basket gds and services in base yr TIMES 100
|
|
|
Definition of inflation
|
an increase in the overall level of prices in the economy, as measured by a price index
|
|
|
Definition of inflation rate
|
the percentage change in the price index from the preceding period
|
|
|
Definition of deflation
|
a situation in which the prices of most goods and services are falling over time
|
|
|
Definition of deflation rate
|
negative inflation rate = the percentage change in the price index from the preceding period
|
|
|
Example of how to calculate inflation(deflation) rate
|
CPI 07' - CPI 06' / CPI 06'
|
|
|
Nominal wage =
|
wage measured in current dollars
|
|
|
Real wage =
|
the wage paid to workers measured in terms of purchasing power
|
|
|
Formula for real wage
|
Real wage(t) = nominal wage (t) / CPI(t) x 100
|
|
|
How to find percent change in real wage
|
1. use real wage formula to find real wage for each year
2. plug those numbers into the percent change formula |
|
|
What is the other method of finding wage inflation besides real wage?
|
Using the formula with only terms of TODAY'S dollars
|
|
|
Formula for finding wage inflation in terms of today's dollars
|
Wage in todays dollars (07') = wage in year t (06') x CPI(today 07') / CPI(t 06')
|
|
|
When do you adjust wages for deflation and inflation?
|
deflation = real wage salaries
inflation = todays dollars |
|
|
Definition of Indexation
|
the automatic correction
of a dollar amount for the effects of inflation by law or contract |
|
|
2 examples of indexation payments
|
social security payments and labor union wages
|
|
|
3 problems with CPI as a measure of inflation
|
1. substitution bias
2. intro of new goods 3. quality adjustment bias |
|
|
Substitution bias
|
consumers will substitute out of the relatively more expensive good and into the less expensive good
|
|
|
Intro of new goods
|
new goods introduced makes cost of living lower
|
|
|
Unmeasured quality change
|
goods and services are often improved
|
|
|
Total result of 3 problems with CPI measurement
|
it overstates inflation rate by about 1%
|
|
|
Definition of nominal interest rate
|
R
usually reported without a correction for the effects of inflation |
|
|
Definition of real interest rate
|
r
corrected for the effects of inflation |
|
|
Equation for real interest rate
|
real interest rate = nominal interest rate - inflation rate
|
