Transcript Year Cost of Basket CPI

Ecological Economics
Lecture 10
20th May 2010
Tiago Domingos
Assistant Professor
Environment and Energy Section
Department of Mechanical Engineering
Collaboration: Rui Pedro Mota
[email protected]
Temporal Comparison - Real vs Nominal
• What part of the change in national accounts aggregates at current prices
stems from a change in the quantities (changes in volume) produced and
what part stems from a change in prices (inflation)?
Item
Nominal GDP in:
- 2007, €200
- 2008, €575
Quantity
Price
2007
Bread
100
€1.00
Butter
20
€5.00
Bread
160
€ 0.50
Butter
22
€ 22.50
2008
Price Level and CPI
• Consumer Price Index (CPI)
– It is based on a fixed (changes every 5 years) basket of goods that are
normally an important part of households’ consumption.
• 1 – Fix the Basket - which prices are most important to the typical consumer? Put
weights by surveying consumers and finding the basket of goods and services that the
typical consumer buys.
• 2 – Find the prices for each good and service in the basket.
• 3 – Compute the basket’s cost (price * quantity)
• 4 – Choose a base year and compute the CPI Formula
• 5 – Compute inflation as the rate of change in CPI
Price Level and CPI
• Macroeconomic measure of consumer price inflation
• Basket of goods: 5 Breads, 1 Butter
Year
Cost of
Basket
CPI
2007
€10
100
2008
€25
250
• Inflation rate = rate of change of price level,
• 150% = (250-100)/100
Price Level and GDP deflator
• Movements in the volume of GDP are calculated by recalculating (using multiple
price indexes) the values of the various components of GDP at the constant
prices either of the previous year or of some fixed base year (SNA93)
• GDP Deflatoryear x = (Nominal GDPyear x ÷ Real GDPyear x ) * 100.
Year
Nominal GDP
Real GDP
GDP deflator
2007
€200
€200
100
2008
€575
€270
213
• Direct calculation of Real GDP = 160 x 1€ + 22 x 5 € = 270 €
• Rate of change in GDP Deflator,
• 113% = (213-100)/100*100
GDP deflator vs CPI
• Both reflect the current level of prices relative to the level of prices in the
base year.
GDP Deflator
CPI
-Prices of all goods and
services produced
domestically.
-Prices of all goods and
services bought by
consumers.
- Compares the changes
in volume of currently
produced goods.
- Compares a fixed basket
of goods and services.
GDP deflator vs CPI
• Both reflect the current level of prices relative to the level of prices in the
base year.
Fixed list and
quantities of
consumed goods
Intensive –
measurable by
sampling
CPI
Changes in
price
Fixed list and
prices of produced
goods
Extensive –
more difficult to
measure by sampling
Changes in
quantities
GDP deflator
GDP deflator vs CPI (Portugal)
Inflation
35
Oil Price shock, 1973
30
25
20
%
CPI
GDP Deflator
15
10
5
0
1964
1969
1974
Source: AMECO database and UN data
1979
1984
1989
1994
1999
2004
Convert Nominal into Real
• Current price figures measure value of transactions in the prices relating
to the period being measured.
• Constant price series can be used to show how the quantity or volume of
goods has changed, and are often referred to as volume measures.
• Using the GDP deflator (Def) to deflate a variable V in current prices to
Vyear x to prices of a base year Vbase year:
• Vbase year = (Defbase year ÷ Defyear x ) * Vyear x.
• Using the CPI to deflate Vyear x to Vbase year:
• Vbase year = (CPIbase year ÷ CPIyear x ) * Vyear x.
Real vs. Nominal (Portugal)
200
Milliards euros
180
160
Gross domestic product at 2000
market prices
140
Gross domestic product at
current market prices
120
100
80
60
40
20
0
1960
1965
Source: AMECO database
1970
1975
1980
1985
1990
1995
2000
2005