1. Chapter 7 homework Number 2: Scott Anderson Number 4: Eikeem Barron Number 10: Kelly Beck Number 14: Meghan Bouvier Number 16: Thomas Caruso Alternate: Matt Herr

2. Chapter 8 Inflation and Prices

3. Calculating the CPI (cont’d) The CPI is computed as: Example: Suppose the market basket cost $400 per month in 2003 (the base year) and $412 in 2004. Then the CPI in 2004 is:

4. Table 8.1 The Consumer Price Index: 1990–2004

5. Interpreting the CPI The inflation rate is measured as the percent change in prices from one period to another:

6. Evaluating the CPI in Practice CPI is not perfect Three major sources of error in the CPI that can cause the CPI to overstate inflation:  Individual price movements Some goods have larger price changes, some smaller, some don’t change  Changes in the market basket Do you buy everything in the market basket?  Household adjustment to price changes What if you get a “good deal” on a good? Substitution bias…

7. Is the market basket different? People make different decisions today than they did a generation or two ago:  More women work outside the home.  People eat outside the home more often.  A greater proportion of the of the population lives in suburbs.  Technological innovations have improved the quality of goods such as cars.

8. Figure 8.2 Sample Entries in the U.S. Market Basket in 1951 and 2001

9. Substitution Bias and the CPI Consumers substitute relatively cheaper goods for relatively more expensive goods. To reduce this problem the BLS has changed its approach to the market basket.  Rather than keeping the purchases of each item constant, the BLS holds constant the proportion that the consumer spends on broad categories of goods and services.

10. The U.S. Experience with Inflation The U.S. experienced deflation during the Great Depression of the 1930s.  General decrease in prices. Inflation reappeared as the U.S. began military build-up for World War II. Starting in the mid-1960s, inflation became an increasingly serious problem.

11. Chapter 8 homework Numbers 4, 6, 8, 16 and 18

12. Chapter 9 GDP and the Business Cycle

13. Defining GDP Gross domestic product (GDP) is the total market value of all new, final goods and services produced in a given country over a given period of time.

14. Calculating GDP To determine how much output society produces, we must somehow add many different items.