Module 15
Mar 2015
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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
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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
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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
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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)
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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%
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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.