Transcript Chapter 13.2 GDP & Changes in the Price Level

Chapter 13.2
GDP & Changes in the Price
Level
Warm-Up:
What do you think the
picture means?
Explain.
Answer:
Time and money lose value
 Why?
 Inflation
 Decrease in value of purchasing power as
the result of demand for more goods than
producer can supply
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Constructing A Price
Index
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Inflation: a rise in the general price level
Price Index: a statistical series that can
be used to measure changes in prices
over time
Steps to Constructing A Price Index
Base Year: A year that serves as the basis
of comparison of all other years
Market Basket: a representative selection
of commonly purchased goods & services
Record the price of each item
Total the prices (= the base year market
basket price & assigned a value of 100%)
Major Price Indices
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Consumer Price Index: reports on price
changes for about 80,000 items in 364
categories
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http://data.bls.gov/cgi-bin/cpicalc.pl
Producer Price Index: measures price
changes paid by domestic producers for their
inputs
Implicit GDP Price Deflator: an index of
average levels of prices for all goods and
services in the economy
Real vs. Current GDP
Current: when GDP is not adjusted to remove
the effects of inflation
 Real GDP or GDP in constant dollars: when
the distortion of inflation has been removed
Real GDP= GDP in current dollars X 100
implicit GDP price deflator
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