Economic Activity Measurement Notes P2

What is the Consumer Price Index (CPI)?

A measure showing the cost of a defined basket of goods and services relative to a base year, used to evaluate price levels and measure inflation.

What does the basket of goods and services include in CPI?

The composition of items in the CPI, including food, clothing, housing, healthcare, and transportation.

What are the limitations of the CPI?

1) It doesn’t account for consumer substitution toward cheaper goods.

2) It ignores increased purchasing power from new goods.

3) It can be distorted by unmeasured quality changes.

What is the formula to calculate CPI?

CPI is calculated using the formula: (Price of basket in current year / Price of basket in base year) x 100.

What is the GDP Deflator?

A measure that reflects the prices of all domestically produced goods and services, adapting to the changing composition of GDP.

How is inflation defined?

The percentage change in the price index over a period, calculated as (CPI in Year 2 - CPI in Year 1) / CPI in Year 1 x 100.

What is the nominal interest rate?

The interest rate that measures the change in monetary amounts; the actual rate of interest charged when money is borrowed.

What is the real interest rate?

The nominal interest rate adjusted for inflation, indicating the actual increase in purchasing power.

What are the steps to calculate CPI?

1. Fix the basket. 2. Find prices at each time point. 3. Compute the basket’s cost over time. 4. Choose a base year and calculate CPI.

What are economic indicators?

CPI and GDP deflator, used to track price levels and inflation.

What are interest rate policies?

Policies involving changing interest rates to control inflation and economic growth.

What is the difference between real and nominal interest rates?

Nominal rates reflect monetary changes, while real rates are adjusted for inflation to show actual purchasing power.

What are the implications of inflation?

Inflation affects purchasing power, cost of living, and can influence monetary policy decisions.