1. Price Indices and Deflators Correction factors from nominal to real Math Notes & Ch 7 & 8

2. Concepts Base year: Arbitrary (ends in 2 or 7) Base year index = 100 Real-Nominal Corrector = 1 in base year Basket of Goods –GDP –CPI –WPI

3. Index is a weighted average Simple: for freshmen Actual: 2nd year graduate course to study the desirable properties of various formulae

4. Market Basked and Prices Prices Good Units 1990 1995 2000 A 10 1.0 2.0 4.0 B 5 1.0 2.0 5.0 C 20 1.0 2.0 2.0 Value Basket VB(YR) =  P i,YR B i Therefore VB(90) = 10 x 1.0 + 5 x 1.0 + 20 x 1.0 = 35 What is VB(95) ? What is VB(00) ? Simple price index: sI(YR,BY) = (VB(YR)/VB(BY)x100 What is sPI(95,90)? sPI(00,90)? sPI(90,00)?

5. If market basket changes, inflation index is geometric mean. Prices Good Units(90) Units(95) 1990 1995 2000 A 10 10 1.0 2.0 4.0 B 5 10 1.0 2.0 5.0 C 20 10 1.0 2.0 2.0 sPI(uYr, YR, Base) = (VB(uYR, YR)/VB(uYR, Base))x100 wPI(uYR,vYR, YR, Base) = (sPI(u..) x sPI(v..)) 1/2 wPI(90, 95, 00, 90) = ([105/35] x 100 x [110/30] x 100) = 331 What is wPI(90,95,00,95)?

6. Price Deflator for Macro Variable (MV) Real(MV) x Deflator(MV) /100 = Nominal(MV) Given the following data: Year 1990 2000 Nominal GDP 2000 ? Real GDP 1000 2000 GDP Deflator ? 150