Transcript Measuring Inflation

GDP at current
prices
NOMINAL GDP
For 2013 GDP we use prices paid in 2013
.
GDP at
constant
prices
REAL GDP
For 2013 real GDP we use prices paid in
base year.
Price of
Shoes
Price of
Apple
Price
Computer
PRICE INDEX
A number that represents all prices for a
given period of time –say a year-.
Apples
Nominal
GDP
Price
Apples
Price
Computer
Price Apple
=
Apples
Real
GDP
Nominal GDP = (30 apples x $0.2) + (100 computers x
$800) + (300 haircuts x $10) + (50 cars x $15,000) +
(60 houses x $450,000) + … = $17,120
Real GDP= (30 apples x $0.1) + (100 computers x
$300) + (300 haircuts x $5) + (50 cars x $10,000) + (60
houses x $250,000) + … = $16,000
Nominal GDP 17,120
=
Real GDP 16,000
5
The GDP Deflator
• A price index calculated from nominal
and real GDP.
• Called “implicit” price deflator because
it is the price implicit in the difference
between real and nominal GDP.
The GDP Deflator
Formula
GDP Deflator =
Nominal GDP
Real GDP
X 100
Inflation Rate
(Deflator Year X)
-
(Deflator previous year)
X 100
(Deflator previous year)
Year
2005
2006
2007
GDP Deflator Inflation Rate
113
116
119
8
Which offer is better?
Colombia
$500,000 Pesos
Rent is
$250,000
Bolivia
$650 Bolivianos
Rent is
$100
What is important is NOT how
much they pay you, but how
much you CAN BUY with what
they pay you
9
Which offer is better?
Colombia
$500,000 Pesos
Rent is
$250,000
Food is
$50,000
Bolivia
$650 Bolivianos
Food is
$200
Rent is
$100
WeSome
need to
put all
things
areprices
moreinto
ONE
single measure
to be
expensive,
others are
ablecheaper…
to see which salary buys
more.
The Consumer Price Index
The CPI measures average change
in prices over time for a basket of
goods and services.
11
A Basket of Basic
Necessities
28,000 diaries
and 60,000
interviews
Determine
What and How
Many?
1.
2.
3.
4.
5.
6.
7.
2007-2008
8.
FOOD AND BEVERAGES
(breakfast cereal, milk, coffee,
chicken, wine, full service meals and
snacks);
HOUSING (rent of primary
residence, owners' equivalent rent,
fuel oil, bedroom furniture);
APPAREL (men's shirts and
sweaters, women's dresses,
jewelry);
TRANSPORTATION (new vehicles,
airline fares, gasoline, motor vehicle
insurance);
MEDICAL CARE (prescription drugs
and medical supplies, physicians'
services, eyeglasses and eye care,
hospital services);
RECREATION (televisions, cable
television, pets and pet products,
sports equipment, admissions);
EDUCATION AND
COMMUNICATION (college tuition,
postage, telephone services,
computer software and accessories);
OTHER GOODS AND SERVICES
(tobacco and smoking products,
haircuts and other personal services,
funeral expenses).
Although not a “price” CPI
includes
Some government-charged user fees:
• Water and sewerage charges, auto registration fees,
and vehicle tolls.
The CPI also includes taxes:
• Such as sales and excise taxes that are directly
associated with the prices of specific goods and
services.
CPI Excludes
Personal Taxes:
• Such as income and Social Security taxes that are
not directly associated with purchase goods and
services.
Prices of paper goods:
• Such as stocks, bonds, real estate, and life insurance.
These are saving instruments not consumer goods.
Relative Importance
What is included in each
category?
Calculating the CPI
Basket
Quantity Price Base Year
Food
10
$10
Doctor
2
$50
Rent
1
$700
Gasoline
50
$2
Basket Cost
$1000
16
Item
Food
Doctor
Rent
Gasoline
Basket Cost
Quantity Price Base Year
10
$10
2
$50
1
$700
50
$2
$1000
CPI= (Basket Cost current year /
Basket Cost base year)*100
Price Today
$20
$100
$1400
$4
$2000
Basket is 2 times
more expensive
today than in the
base year
Real Wage = Nominal Wage/Price Index)*100
Item
Food
Doctor
Rent
Gasoline
Basket Cost
CPI
Nominal
Wage
Real Wage
Quantity Price Base Year
10
$10
2
$50
1
$700
50
$2
$1000
Price Today
$20
$100
$1400
$4
$2000
(1000/1000)*100=100 (2000/1000)*100=200
$1000
$1000
($1000/200)*100 = $500
$1,000 today buys half of what you could buy
with $1,000 in the base year.
Which offer is better?
Colombia
$500,000 Pesos
Bolivia
$650 Bolivianos
The Core Consumer Price Index
The CPI Measures what consumers are paying for
goods and services at malls, grocery stores and
other retail locations.
Unlike the overall CPI, the core CPI excludes
food and energy prices, which can bounce
around enough each month to distort the overall
price trend picture.
For the most recent core CPI data, click here.
20
Updating the Market Basket
• CPI revisions occur approximately every 10
years.
• The most important revision is the introduction of
a new “market basket”
• The last revision to the CPI started in 1998 and
completed in 2000.
21
Why is the CPI important?
•
•
•
•
Government use prices to set interest rates.
Used in labor contracts.
Landlords use it to determine rents.
Judges use it to determine alimony and child
support payments.
• Used to adjust payments to:
• Social Security recipients (50 million)
• Federal and Military retirees
• Food Stamps and School Lunches (25 million)
• Used to adjust individual income tax brackets.
Cost Of Living Adjustment
Calculation is based on the increase in the
CPI from the third quarter of the prior year
to the third quarter of the current year.
2004
2005
2006
2007
2008
2009
2010
CPI
186
192
197.2
205.8
204.8
211.7
215.889
Inflation
3.23
2.71
4.36
-0.49
3.37
1.98
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Change in CPI
relative to
previous year not
to base year
Inflation Rate for Year X
(CPI Year X) - (CPI previous year)
X 100
(CPI previous year)
Item
Food
Doctor
Rent
Gasoline
Basket
Cost
Price
Base
You
need
100%
money in Price 2008
Quantity more
Year
09 than
10
10 in 08 to
20
buy the same
2
50
100
basket.
1
50
700
2
1400
4
Price 2009
40
200
2800
8
1000
2000
4000
2
Basket is
times more
expensive in 2009
than in the base year
Basket is times
more expensive in
2008 than in the
base year
CPI
Inflation
100
4
200
400
(400-200)/200)*100=100%
26
Comparing dollar values across
time
CPI (1930) = 16.7
CPI (2011) = 226
1930
$100
2011
(226)/(16.7)
Multiply
=13.5by 13.5
$1,350
?
Prices in 2011 are 13.5 times larger than in 1930
You need to have 13.5 times as much money in 2011
27
Inflation
• Refers to an INCREASE in the price
level from one period to the next.
• Inflation can be high (20%) or low (2%)
• When inflation drops (say from 20% to
2%) prices still INCREASE.
28
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
CPI
39.8
41.1
42.5
46.3
51.9
55.6
58.4
62.3
67.9
76.9
Inflation %
3.3
3.4
8.9
12.1
7.1
5.0
6.7
9.0
13.3
Deflation
• Refers to a DECREASE in the price
level from one period to the next.
• Deflation results in a NEGATIVE
inflation rate.
• Describes a DROP in prices.
30
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
CPI
39.8
41.1
42.5
46.3
51.9
55.6
58.4
62.3
67.9
76.9
66.9
Inflation/
Deflation
3.3
3.4
8.9
12.1
7.1
5.0
6.7
9.0
13.3
-13.0
Problems Measuring
the Cost of Living
1. Substitution Bias: Because the basket
is fixed, the CPI does not account for
substitutions consumers do in
response to higher prices.
32
New Basket: More General
Categories
Ignores substitution
away from “frozen” to
“cake-like” desserts
4 ice creams
3 apples
4 Frozen Desserts
3 Fruits
Old
New
33
2.0 MB floppy
to 256 Gb
flash drive
Problems with CPI…
2. New Goods not included in the basket allow
consumers to attain the same (or higher)
standard of living at lower cost.
3. Unmeasured Quality change: If quality
improves, a dollar buys more.
34
Chained CPI
• Utilizes expenditures in both the current and
base time periods in order to reflect the effect of
any substitution that consumers may make
across item categories in response to changes in
relative prices.
• On average, the chained CPI is less than the
conventional CPI by 0.25 to 0.3 percentage
points.
• The Bureau of Labor Statistics has been tracking
chained CPI since 2002.
GDP Deflator vs. CPI
Reflects prices of ALL
goods and services
produced purchased by
Consumers, Firms,
Government, Other
countries.
36
The GDP Deflator vs. CPI
GDP Deflator
CPI
Uses a basket with
different goods and
different quantities
Uses current
production items
and quantities.
Uses a basket with
same goods and
same quantities
Uses the Market
Basket
37
Inflation Calculator
This site finds the equivalencies for dollars in different
years.
http://data.bls.gov/cgi-bin/cpicalc.pl
38
Measuring Prices
• The Consumer Price Index (CPI) measures inflation as
experienced by consumers in their day-to-day living expenses
• The Producer Price Index (PPI) measures inflation at earlier
stages of the production process
• The Employment Cost Index (ECI) measures inflation in labor
costs
• The BLS International Price Program measures price
changes for imports and exports
• The Gross Domestic Product Deflator (GDP Deflator)
measures inflation experienced by both consumers
themselves as well as governments and other institutions
providing goods and services to consumers.
39
Employment Cost Index (ECI)
Average Hourly Earnings (AHE)
ECI comes out quarterly and measures changes in
employee wages, salaries and benefits.
AHE, the Employment Situation report, comes out
monthly, shows how worker wages are changing month
to month.
Both are important because rapidly rising labor costs can
force businesses to raise prices to compensate, spurring
inflation. For the most recent ECI data, click here. For
the most recent AHE data, click here