Price Index Calculation See the practice (with answers) on- line as well as Mod 15 in Krugman.

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Presentation transcript:

Price Index Calculation See the practice (with answers) on- line as well as Mod 15 in Krugman

How to calculate a price index Price index in Year 2 (580/480) x 100 = 121

How to calculate a price index Price index in Year 2? Year 3? Assume year 1 is the base year

How to calculate percent change in prices Current year – First year First year

How to calculate inflation CPI 1980 = 100 CPI 1981 = 110 Inflation rate = r 10%

PRACTICE: Calculate CPI for EACH year

ANSWERS Now, calculate the rate of inflation… -period 1 to 2 -Period 2 to 3 -Period 1 to 3

ANSWERS 1 to 2 = 16.25% – =.0559 x 100 = 5.6% – =.2275 x 100 = 22.75%

Calculate CPI

ANSWERS $486CPI= $531CPI= ((531/486) x 100) Now, calculate the rate of inflation from 2000 to 2001

Calculate rate of inflation: Answers – %

GDP Deflator practice

ANSWERS

What’s the difference between CPI and GDP Deflator? Not much…both show similar trends CPI advantages – Includes imports – reflects common goods/services used GDP Deflator – Compensates for consumer substitutions – Compensates for changes in taste- not limited to “market basket” – Compensates for price increase due to quality