Unit Two: Other Indexes

Goals Be able to apply the equation of the GDP deflator to find the inflation rate and real GDP.

I. The Producer Price Index PPI or “Wholesale Price Index” Measures the cot of a typical basket of goods and services– containing raw commodities such as steel, electricity, coal– purchased by consumers. Reacts relatively quickly; “early warning sign”; fluctuates more

GDP Deflator II. The GDP Deflator Not a price index, but serves the same purpose. Measures patterns of inflation. GDP Deflator = (Nominal GDP/ Real GDP) 100 Moves closely with CPI

Real GDP Real GDP = (Nominal GDP/ GDP Deflator) 100 II. The GDP Deflator Real GDP Real GDP = (Nominal GDP/ GDP Deflator) 100

III. Practice 1. The accompanying table contains the values of two price indexes for the years 2004, 2005, and 2006: the GDP deflator and the CPI. For each price index, calculate the inflation rate from 2004 to 2005 and from 2005 to 2006. Year GDP Deflator CPI 2004 96.8 188.9 2005 100.0 195.3 2006 103.3 201.6 Deflator 2004-05: 3.3% 2005-06: 3.3% CPI 2004-05: 3.4% 2005-06: 3.2% If GDP for 2004 was 16,000, 2005 16,500 and 2006 17,500 Which year would be the base? What would real GDP be for 2004 and 2006?