1. Module 15 Mar 2015

2.  Aggregate price level – a measure of the overall level of prices in the economy  Market basket – a hypothetical set of consumer purchases of goods and services  Consumption bundle – typical basket of g & s purchased before the price changes ◦ Suppose we’re looking at citrus ◦ Pre-frost O =.20, G =.60, L =.25 ◦ Qty 200 O, 50 G, 100 L ◦ Total cost is $95.00

3.  Post – frost ◦ O =.40, G = 1.0, L =.45 ◦ Qty same ◦ Total cost of market basket is $175.00 Price Index – measures the cost of purchasing a given market basket in a given year. The index value is normalized so that it is equal to 100 in the selected year. Price Index in a given year = Cost of MB in a given year x 100 Cost of MB in base year

4.  Inflation rate =  Price index in year 2 – Price index in year 1 x 100  Price Index in year 1  Consumer price index (CPI) – measures the cost of the market basket of a typical urban American family  Today’s CPI is based on the years 1982-1984 (yay – that’s when I was in high school)

5.  Housing 43%  Food and beverage 16%  Transportation 12%  Medical Care 6%  Recreation 6%  Education and Communication 6%  Apparel 4%  Motor Fuel 3%  Other g & s 3%

6.  Producer Price Index (PPI) – measures changes in the prices of g & s purchased by producers  GDP deflator – for a given year is 100 times the ratio of nominal GDP to real GDP in that year.