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

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

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

4. How to calculate percent change in prices Current year – First year ---------------------------------- First year

5. How to calculate inflation CPI 1980 = 100 CPI 1981 = 110 Inflation rate = 110-100 10 ----- ----- 0r 10% 100100

6. PRACTICE: Calculate CPI for EACH year

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

8. ANSWERS 1 to 2 = 16.25% 122.75 – 116.25 6.5 -------------------------------- =.0559 x 100 = 5.6% 116.25 116.25 122.75 – 10022.75 --------------------------- =.2275 x 100 = 22.75% 100100

9. Calculate CPI

10. ANSWERS 2000- $486CPI= 100 2001- $531CPI= 109.26 ((531/486) x 100) Now, calculate the rate of inflation from 2000 to 2001

11. Calculate rate of inflation: Answers 109.26 – 1009.26 ------------------ ------------9.26% 100 100

12. GDP Deflator practice

13. ANSWERS

14. 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