Economics 2 - Measuring Aggregate Prices CHAPTER 2

This set of vocabulary flashcards covers the fundamental concepts of measuring price evolution, including basic and composite indices, inflation measurement biases, and the conversion of nominal variables to real variables.

Price Index (PI)

A measure of the price level of a basket of goods and/or services at a given date, compared to the price level of the same basket at a chosen reference date called the baseline date.

Basic Price Index

An index that quantifies the evolution of a single product $i$'s price between a baseline date $a$ and a given date $t$, defined by the ratio P_{i, t|a} \thickspace \text{\textequiv} \thickspace \frac{p_{it}}{p_{ia}}.

Index Base

The numerical value an index takes at the baseline date; it indicates the index's value at that reference point (e.g., base $1$ or base $100$).

Growth Rate of Product $i$ (posterior to baseline)

The rate at which the price of product $i$ has grown between baseline date $a$ and time $t$, calculated as $P_{i, t|a} - 1$.

Composite Price Index

An index designed to synthesise the evolution of the prices of a set of different products into one single measure, such as a consumer price index or a stock market index.

Laspeyres Price Index

A price index that tracks the evolution of prices using a fixed weighting based on the composition of the product basket observed at the baseline date ($a$), calculated as P^{Laspeyres}_{t|a} \thickspace \text{\textequiv} \thickspace \frac{\text{\textsum}_{i=1}^n p_{it}q_{ia}}{\text{\textsum}_{i=1}^n p_{ia}q_{ia}}.

Consumer Price Index (CPI) in Belgium

A Laspeyres PI published by the FPS-Economy following the price evolution of a basket comprising $520$ goods and services, split into $12$ categories.

Indice Sant´e

The Belgian Consumer Price Index calculated following the standard basket but excluding alcoholic beverages, tobacco-based products, and motor fuels.

Harmonised CPI (HCPI)

A CPI computed using a basket of goods and services harmonised at the European Union level to facilitate comparisons between EU countries.

Substitution Mechanism Bias

A phenomenon where Laspeyres indices potentially overestimate inflation because they do not account for consumers shifting their consumption toward relatively cheaper goods when prices rise at different rates.

Nominal Variable

A variable measured in current monetary units using the prices as measured at the exact time the variable is observed.

Real Variable

A variable reconstructed by eliminating the impact of aggregate price evolution on a nominal variable; it is defined as the ratio between a nominal variable ($v^n_t$) and a price index ($P_{t|a}$).

Real value of the purchase of good $i$

The value of a purchase using the price of the reference date $a$, obtained by deflating the nominal value: $v^r_{i, t|a} = p_{ia}q_{it}$.

Real Wage

The ratio between the nominal wage ($w^n_t$) and a consumption price index ($P_{t|a}$), representing the purchasing power expressed as the number of reference consumption basket units one can buy.

Price Index (PI)

A measure of the price level of a basket of goods and/or services at a given date, compared to the price level of the same basket at a chosen reference date called the baseline date.

Basic Price Index

An index that quantifies the evolution of a single product $i$'s price between a baseline date $a$ and a given date $t$, defined by the ratio P_{i, t|a} \thickspace \text{\textequiv} \thickspace \frac{p_{it}}{p_{ia}}.

Index Base

The numerical value an index takes at the baseline date; it indicates the index's value at that reference point (e.g., base $1$ or base $100$).

Growth Rate of Product $i$ (posterior to baseline)

The rate at which the price of product $i$ has grown between baseline date $a$ and time $t$, calculated as $P_{i, t|a} - 1$.

Composite Price Index

An index designed to synthesise the evolution of the prices of a set of different products into one single measure, such as a consumer price index or a stock market index.

Laspeyres Price Index

A price index that tracks the evolution of prices using a fixed weighting based on the composition of the product basket observed at the baseline date ($a$), calculated as P^{Laspeyres}_{t|a} \thickspace \text{\textequiv} \thickspace \frac{\text{\textsum}_{i=1}^n p_{it}q_{ia}}{\text{\textsum}_{i=1}^n p_{ia}q_{ia}}.

Consumer Price Index (CPI) in Belgium

A Laspeyres PI published by the FPS-Economy following the price evolution of a basket comprising $520$ goods and services, split into $12$ categories.

Indice Sant´e

The Belgian Consumer Price Index calculated following the standard basket but excluding alcoholic beverages, tobacco-based products, and motor fuels.

Harmonised CPI (HCPI)

A CPI computed using a basket of goods and services harmonised at the European Union level to facilitate comparisons between EU countries.

Substitution Mechanism Bias

A phenomenon where Laspeyres indices potentially overestimate inflation because they do not account for consumers shifting their consumption toward relatively cheaper goods when prices rise at different rates.

Nominal Variable

A variable measured in current monetary units using the prices as measured at the exact time the variable is observed.

Real Variable

A variable reconstructed by eliminating the impact of aggregate price evolution on a nominal variable; it is defined as the ratio between a nominal variable ($v^n_t$) and a price index ($P_{t|a}$).

Real value of the purchase of good $i$

The value of a purchase using the price of the reference date $a$, obtained by deflating the nominal value: $v^r_{i, t|a} = p_{ia}q_{it}$.

Real Wage

The ratio between the nominal wage ($w^n_t$) and a consumption price index ($P_{t|a}$), representing the purchasing power expressed as the number of reference consumption basket units one can buy.