Econ Section III - Measuring Inflation (Real GDP and CPI)

What is Real GDP

GDP using prices from a fixed year price

What is the Base year in Real GDP

the Base Year of which other years compare to

What is Nominal GDP

GDP using prices with current prices

What is GDP deflator

(Nominal GDP / Real GDP) x 100

How does GDP state the cost of living compared to CPI?

Less volatile in general because it essentially measures a wieder range of goods

Why does the GDP Deflator tend to measure lower than the CPI?

-only domestic products

-adapts to changing consumption patterns.

What does CPI stand for

Consumer Price Index

Who Calculates CPI

US Burea of Statistics

What is CPI

The Price of a certain basket of goods and services that would represent a typical consumer

How often is CPI measured

each month

How is the Market Basket of goods for CPI measured

the Consumer Expenditure Survey carried out by the Bureau of Statistics

How is CPI expressed

As a index cost relative to the index cost of a base year ( above 1 if prices have increased and vice versa )

How do you Calculate CPI

CPI in year t = 100 × (cost of bundle in year t)/(cost of bundle in base year).

what are the 3 causes for CPI to overstatement the cost-of-living

-Substitution Bias,

-Unmeasured Quality Change

-New Goods & Services

How does Substitution Bias cause CPI to overstate the Cost of Living

As relative prices change, households will shift their

consumption away from more expensive goods and

services and toward less expensive ones.

How does Unmeasured Quality Change cause CPI to overstate the Cost of Living

highlights how technology gets better over time meaning that goods will get better over time and provide more to consumers

How does New Goods & Services cause CPI to overstate the Cost of Living

When new goods are released it takes time for them to be measured in CPI, meaning that when they are first released CPI wont measure the added cost of living of new goods

What are the 2 main ways to measure Inflation?

-CPI

-GDP deflator

What happened in 1996 that lead to the discovery that CPI overstated the cost of living

the Boskin Comission (1996)

Who headed the Boskin Commission

Michael Boskin

the Boskin Commission discovered that CPI overstated the rate of inflation by how much a year?

1.3%

What is the Labor Force

includes employed & those seeking work

What is the Labor Force Participation Rate

LABOR FORCE / WORKING-AGE POPULATION

How Old do you need to be to be in the Labor Force?

16

what % was the Labor Force Participation Rate? in July 2020

61.4%

How many people are in the Labor force in July 2020

260 million over 16, 160 million in the Labor Force

What was the Unemployment rate in July 2020

10.2% 143.5 million were employed, 16.3 million were unemployed

What was the Unemployment rate in 2019

3.4%