Chapter 13, Section 2 Price Indexes

Constructing a Price Index Used to measure changes in P. over time Created by selecting a base year and a representative mkt. basket of goods

Major Price Indexes Consumer Price Indexes (CPI)- reports change in P. of 80,000 consumer goods and services

Price Indexes (cond) Producer Price Index (PPI)- reports change in P. received by domestic producers for100,000 commodities

Implicit GDP Price Deflator An index of average levels of prices for all goods and services in the economy Only compiled quarterly, cannot be used to measure monthly changes in inflation

Real v. Current GDP Economists need to distinguish between changes in GDP because of the effects of inflation and changes in GDP that represent increases in production and income Current GDP is not adjusted to remove the effects of inflation Real GDP is calculated by dividing current GDP by the implicit GDP Price deflator and multiplying by 100 Converting current GDP into real GDP is useful for comparing GDP over time

Converting GDP to Real Dollars Real GDP= GDP in current dollars X 100 implicit GDP price deflator