Mankiw Principles Of Macro Ch. 11 Measuring The Cost Of Living

Front 1

CPI (calculation of index) =

Back 1

(Price of basket of goods and services in current year / Price of basket in base year) x 100

Front 2

CPI: 5 steps to calculate inflation rate

Back 2

1. survey consumers to determine a fixed basket of goods.
2. find the price of each good in each year.
3. compute the cost of the basket of goods in each year.
4. Choose one year as a base year and compute the CPI in each year.
5. Use the CPI to compute the inflation rate from the previous year

Front 3

Inflation rate: calculation from CPI

Inflation rate in year 2 =

Back 3

[(CPI in year 1 - CPI in year 1) / CPI in year 1] x 100

Front 4

Substitution bias

Back 4

The price index is computed assuming a fixed basket of goods, and therefore ignores the possibility of consumer substitution, and therefore overstates the increase in the cost of living from one year to the next.

Front 5

Producer Price Index

Back 5

a measure of the cost of a basket of goods and services bought by firms

Front 6

Introduction of new goods as a problem for CPI

Back 6

As new goods are introduced, consumers have more choices and so each dollar is worth more. This is not reflected in CPI, which assumes a fixed basket.

Front 7

Indexation

Back 7

the automatic correction by law or contract of a dollar amount for the effects of inflation

Front 8

Real interest rate

Back 8

the interest rate corrected for the effects of inflation

Front 9

Nominal interest rate

Back 9

the interest rate as usually reported without correction for the effects of inflation

Front 10

Differences between GDP Deflator and CPI

Back 10

1. GDP deflator reflects the price of all goods and services produced domestically; CPI reflects the price of all goods and services bought by consumers.
2. CPI compares prices of a fixed basket; GDP deflator compares prices of currently produced goods and services.

Front 11

Dollar figures from different times (calculation)

Back 11

Amount in today's dollars = amount in year t x (price level today / price level in year t)

Front 12

Real interest rate (calculation) =

Back 12

nominal interest rate - inflation rate

Front 13

T or F: nominal interest rates in the US have almost always exceed real interest rates.

Back 13

True. The U.S. has experienced rising consumer prices in almost every year since 1965. Contrast: Japan in recent years has experienced deflation, and nominal interest rates will be lower than real interest rates.

Front 14

Consumer Price Index (CPI)

Back 14

a measure of the overall cost of the goods and services bought by a typical consumer

Front 15

Inflation

Back 15

a situation in which the economy's overall price level is rising

Front 16

Inflation Rate

Back 16

the percentage change in the in the price level from the previous period

Front 17

Fixing the basket (CPI calculation)

Back 17

Baskets are weighted towards the prices that are most important to the consumer (what they buy the most of). BLS sets the weights through consumer surveys.

Front 18

Finding the prices (CPI calculation)

Back 18

Find the prices of each of the goods and services in the basket at each point in time

Front 19

Computing the basket's cost (CPI calculation)

Back 19

Use the data on prices to calculate the cost of the fixed basket of goods and services at different times

Front 20

Choose a base year and compute the Index (CPI calculation)

Back 20

Designate one year as the base year (becomes the denominator)