2.4-2.7 ap macro Inflation, CPI, and Purchasing Power Concepts

inflation

an overall increase in prices which erodses the purchasing power of consumers

deflation

a decrease in prices which strengthens the purchasing power of consumers

disinflation

prices increasing at a slower rate

CPI

Consumer Price Index

a measure of the average change over time in the prices paid by consumers for a fixed "market basket" of goods

-cpi always goes up, but certain goods dont

market basket

selection of g/s that are consistently purchased and sold through an economic system

CACULCATION of CPI

market basket in current yr / market basket in base yr

x100

what is the value of the base year always?

100

-every other yr is always given a index number

who are people that are hurt by inflation?

-lenders (at fixed interest rates)

-savers

-people with fixed incomes

who are people that are helped by inflation?

-borrowers

-a buisiness where the price of product increases faster than the price of resources

unit of account costs

costs associated with money being a less reliable unit o fmeasurment due to inflation

shoe-leather costs

high rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing.

CPI vs GDP

cpi is used to determine how purchasing power has changed over time, while GDP is used to determine how output has changed over time.

nominal gdp

gdp measured in “current dollars”

not calculated for inflation

(current yr price x output)

real gdp

measured in “constant dollars”

has been adjusted for inflation

(base yr price x output)

gdp deflator

measures the change in prices for all g/s

used to convert nominsl GDP into real GDP & vice versa

gdp deflator calculator

nominal gdp / real gdp

x100