Transcript GPD and Changes in Price Level

GPD and Changes in Price
Level
Chapter 13, Section 2
Cover Story “Eyes on the Price”
(pg. 350)

Inflation is a rise in the general
price level


Important to keep track of because it
distorts the economic figures that we
keep
Compare Figure 13.1 (pg. 342) and
13.4 (pg. 351)

What is the difference?
Constructing a Price Index

Price index is a statistical series
that can be used to measure
changes in prices over time (specific
product or range of products)
How do you construct a price index?
(pg. 352, Figure 13.5)
1.
Select a base year – a year that serves as the
basis of comparison for other years
2.
Select the market basket – a representative
selection of commonly purchased goods and
services
3.
Record price of each item into market basket
4.
Total the prices
3 Major Price Indexes
Consumer
Price Index
Producer
Price Index
Implicit GDP Price
Deflator
80,000 items in 365
categories
Computed monthly
100,000 commodities Average levels of all
Computed monthly
goods and services
1982-1984
Base year prices
1982 base year
1996 base year
Computed monthly
Computed monthly
Computed quarterly
28 separate indices
across the nation
Subcategories (farm
products, fuels,
chemicals, rubber,
pulp & paper,
processed foods
Includes all items
included in the GDP
in the economy
Real vs. Current GDP


Current GDP – not adjusted to remove the effects
of inflation
Real GDP – distortions of inflation have been
removed (GDP in constant dollars)
 what the GDP would have been if prices did not
change from what they were in the base year
Converting GDP into Real Dollars

GDP = (GDP in current dollars/implicit GDP price deflator) x100
Comparing GDP in Different Years
Use the same equation but substitute
a different year
Homework
Chapter 13 Questions
#6, 8-13
Computing a Price Index and
Calculating Inflation (Worksheet)