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14 Cards in this Set
- Front
- Back
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Consumer Price Index (CPI) |
-measures the rise and fall of the prices of a typical "Basket of goods" against the Base Year -allows Canadians to judge whether they are better or worse off financially than they were last year -Each month Canada checks the price of 600 common products to see if the CPI has increased or decreased during the last month |
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Where Canadians spend their money |
-Recreation, Education, Reading -Food -Transportation -Shelter -Liquid and Tobacco -Health and Personal Care -Clothing and Footwear -Household Operations and Furnishings |
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Nominal Income |
Your income in current dollars |
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Real Income |
Your income expressed in base year dollars |
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Limitations of CPI |
-Not all consumers have the same spending patterns -the basket of goods might not keep up with reality, peoples spending habits change -basket might not keep up with introduction of new goods |
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Inflation's Effect on Income |
-it will change the purchasing power of your income -decreases purchasing power if nominal income increases less than the inflation rate -increases purchasing power if nominal income increases more than the inflation rate |
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COLA |
-To protect against the change in a person's purchasing power, people (unions) negotiate a Cost of Living Allowance (COLA) |
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Fully Indexed Income |
When a raise to keep up with inflation is done automatically, no negotiations necessary |
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Partially Indexed Income |
An automatic raise but it doesn't keep up with inflation |
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Fixed Income |
An income that doesn't change to keep up with inflation. Raises are negotiated |
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Inflation's Effect on Borrowing |
-If the interest rate is less than the rate of inflation the lender loses out -if the interest rate is more than the rate of inflation the borrower loses out |
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Nominal Interest Rate |
The interest rate expressed in a dollar amount |
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Real Interest Rate |
-Nominal interest rate minus inflation rate |
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Inflation Premium |
Banks want to earn 5% on their money and if they think that inflation will be 3% then they will charge 8% interest. |
