1. Unit Two:
Other Indexes

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

3. 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

4. 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

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

6. 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
: 3.3%
: 3.3%
CPI
: 3.4%
: 3.2%
If GDP for 2004 was 16,000, ,500 and ,500
Which year would be the base?
What would real GDP be for 2004 and 2006?