1. © 2007 Thomson South-Western

2. Measuring the Cost of Living
Consumer Price Index (CPI）：
消費者物價指數
shows the cost of a basket of goods and services bought by a typical family relative to the cost of the same basket in the base year.
‧used to monitor changes in the cost of living over time. When the CPI rises, the typical family has to spend more dollars to maintain the same standard of living.

3. FYI: What Is in the CPI’s Basket?
17%
Transportation
42%
Housing
15%
Food and
beverages 6%
Education and
communication
Medical care 6%
Recreation 6%
Apparel 4%
Other goods
and services 4%

4. How to calculate CPI
The CPI is calculated as follows:

5. Inflation Rate
The Inflation Rate（π）：
通貨膨脹率＝物價上漲率
When π<0：deflation (通貨緊縮)

6. Table 24.1 Calculating CPI & Inflation Rate: An Example

7. Table 24.1 Calculating CPI & Inflation Rate: An Example

8. Problems in Measuring the Cost of Living
CPI：not a perfect measure of cost of living：
(1) Substitution bias
(2) Introduction of new goods
(3) Unmeasured quality changes
cause the CPI to overstate the true cost of living.

9. Ch23: The GDP Deflator
The GDP deflator is calculated as follows:

10. The GDP Deflator vs. CPI
Economists and policymakers monitor both the GDP deflator and CPI to gauge how quickly prices are rising.
two important differences to diverge:
produced domestically vs. bought by consumers
currently produced vs. a fixed basket

11. Taiwan: 2 measures of inflation

12. Taiwan data：π Inflation rate % (GDP deflator) Inflation rate %(CPI)
3.97
4.35
3.64
2.92
10.33
11.07
3.09
3.15
1.91
2.59
-0.49
0.83
1974
π=47.50%
1980
π=19.01%
1981
π=16.32%
π<0

13. Other Price Index
The index for different regions/sectors within the country.
The Producer Price Index
（生產者物價指數）, which measures the cost of a basket of goods and services bought by firms rather than consumers.

14. Correcting Economic Variables for the Effects of Inflation
Price indexes are used to correct for the effects of inflation
when comparing dollar figures from different times.

15. Dollar Figures from Different Times
To convert (inflate) Ruth’s wages in 1931 to dollars in 2001:

16. Indexation（指數化）
When some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.
Indexation for wage
Indexation for interest rate
機動調整

17. Real and Nominal Interest Rates
Interest represents a payment in the future for a transfer of money in the past.
Nominal interest rate （R，名目利率）:
the interest rate usually reported.
It is the interest rate that a bank pays.
Real interest rate （r，實質利率）:
nominal interest rate corrected for the effects of inflation.

18. Real and Nominal Interest Rates
You lend out $100 for one year. P=$1/candy
Nominal interest rate was 10%.
During the year inflation was 6%.
Present $100/$1= 100 units of candies
$100*(1+10%)/[$1*(1+6%)]=103.7 units of candies
Real return= 3.7 units, real rate of return= 3.7%
Real interest rate （real rate of return）
近似= Nominal interest rate – Inflation rate
= 10% - 6% = 4% ( r=R-π)

19. Taiwan: R and π

20. Taiwan data：π and R Inflation rate % (CPI) Nominal R % 1961-2006 4.41
5.10
2.92
4.58
11.07
6.95
3.15
5.95
2.59
5.06
0.67
1.44
1974
47.50
8.50
1980
19.01
9.75
1981
16.32
10.25
(-)
零利率年代

21. Taiwan data: r

22. R , r, and expectation r =R-π So r <0 if R<π r >R if π<0
契約訂定名目利率
R= re + πe (e: expected，預期的)
→ 實現的（realized）或實際的(actual)
r =R-π＝ re + πe -π，
So r < re if πe <π
r = re if πe=π
r > re if πe >π

23. Ch 24: Summary How to calculate CPI? How to calculate Inflation rate?
CPI vs. GDP deflator
Nominal interest rate vs. real interest rate
實際的 actual r =R-π，
R= re + πe (e: expected，預期的)
Possible r < 0?
Possible r > R?