The Measurement and Calculation of Inflation AP Economics Mr. Bernstein Module 15: The Measurement and Calculation of Inflation February 2, 2015

AP Economics Mr. Bernstein Measurement and Calculation of Inflation Objectives - Understand each of the following: How the inflation rate is measured What a price index is and how it is calculated The importance of the Consumer Price Index and other price indexes

AP Economics Mr. Bernstein Price Indexes and the Aggregate Price Level Market Basket is made up of typical goods and services purchased Measuring broad level of inflation, not individual goods and services

AP Economics Mr. Bernstein Market Baskets and Price Indexes Price index in a given year = (cost of the market basket in year t)/(cost of the market basket in the base year) Inflation rate = percentage change between any two values of the index, ie (CPI2013 - CPI2012) / CPI2012 Note: Index value in base year = 100

AP Economics Mr. Bernstein Example: The Deli Index 2012 cost = (300*4)+(200*5)+(100*2)+(500*3)=3900 2013 cost = (300*6)+(200*7)+(100*1.5)+(500*2.5)=4600 DPI (Deli Price Index) increased (4600/3900)-1 = ~18% even though 2 items actually declined in price Item in the Deli Basket Quantity Consumed in a Typical Year 2012 Price per Pound 2013 Price per Pound Corned Beef 300 $4 $6 Salami 200 $5 $7 Turkey 100 $2 $1.50 Cheese 500 $3 $2.50

AP Economics Mr. Bernstein Consumer Price Index (CPI) Computed monthly using a market basket of ~80,000 goods and services consumed by a typical urban family Most widely used measure of inflation Producer Price Index (PPI) measures inflation in inputs used by businesses rather than final products GDP Deflator (Ratio of Nominal GDP to Real GDP) often used in same way, although technically its not an index. Note: Base year for GDP is currently 2000

AP Economics Mr. Bernstein Coincidence of Inflation Measures