1.
How is the inflation rate measured?
2.
What a price index is and how it is calculated?
3.
What is the importance of the consumer price
index and other price indexes?
Aggregate price level: measure of the overall
level of prices in the economy
 Market basket: hypothetical set of consumer
purchases of goods and services
 Price Index: measures the cost of purchasing a
given market basket in a given year. The index
value is normalized so it is always equal to 100 in
the selected base year.
 In other words it is used to track inflation.

1.
With millions of products being purchased
throughout the day and across America, how can
we tell if overall prices are rising or falling?
2.
And if they are rising, are they rising quickly or
slowly?
3.
First it needs to be determined what Americans
are buying in their “market basket”, and then the
prices of those goods, and then all that
information is compiled into one statistic: a price
index.


This Consumer Price Index
(CPI) is the most widely used
measure of price inflation.
It is computed every month
and uses prices for a market
basket of about 80,000 goods
and services that a typical
urban family of four
consumes.
ftp://ftp.bls.gov/pub/special.req
uests/cpi/cpiai.txt
http://www.bls.gov/cpi/#tables
Consumers buy all
sorts of different
goods and services in
a typical year.
This typical basket of
goods and services
purchased is called
the market basket.
Price Index in given year =
Inflation Rate =


Cost of market basket in a given year
X 100
Cost of market basket in base year
Price index in year 2 - Price index in year 1
Price index in year 1
X 100
The base year is the benchmark year. All other years, past and future, are
compared to the base year to see if the market basket was more or less
expensive than it was in that year.
The market basket for 2008 was $3900 and for 2009 was $4600. Use 2008 as
the base year and calculate the price index for 2009 & the inflation rate.
Price Index in given year =
Inflation Rate =
1.
2.
3.
4.
5.
6.
Cost of market basket in a given year
X 100
Cost of market basket in base year
Price index in year 2 - Price index in year 1
Price index in year 1
X 100
The base year is the benchmark year. All other years, past and future, are
compared to the base year to see if the market basket was more or less
expensive than it was in that year.
The market basket for 2008 was $3900 and for 2009 was $4600. Use 2008 as
the base year and calculate the price index for 2009 & the inflation rate.
CPI2008 = ($3900)/($3900) x 100 = 100 *NOTE: any price index is always 100
in the base year*
CPI2009 = ($4600/($3900) x 100= 117.9
Calculating the inflation rate is just calculating the percentage change
between any two values of the price index.
Inflation from 2009 to 2008 = (CPI2009 – CPI2008)/(CPI2008) x 100= (117.9100/100) x 100 = 17.9%
1.
2.
3.
Calculate the prefrost market basket
& the post frost
market basket.
The price index prefrost is equal to
100. What is the
post frost 2009
price index?
Calculate the
inflation rate from
the pre frost 2008
to the post frost
2009.
1.
2.
3.
Calculate the prefrost market basket
& the post frost
market basket.
The price index prefrost is equal to
100. What is the
post frost 2009
price index?
Calculate the
inflation rate from
the pre frost 2008
to the post frost
2009.
Answers:
2. CPI $175_ x 100 = 184.2
$95
3. IR: 184.2 – 100 x 100 = 84.2%
100
2009

The Producer Price Index (PPI) measures the cost of a typical basket of
goods and services—containing raw commodities such as steel,
electricity, coal, and so on—purchased by producers.

The GDP deflator is technically not a price index, but it is used in the
same way. GDP deflator: for a given year is 100 times the ratio of
nominal GDP to Real GDP expressed in prices of a selected base year.

Example: Real GDP is currently expressed in 2000 dollars, the GDP
deflator for 2000 is equal to 100. If nominal GDP (GDP with inflation)
was to increase by 5%, but real GDP does not change, the GDP deflator
indicates that the aggregate price level increased by 5%.

End of Module 15 & Section 3!

Complete Module 15 Review questions.

Prepare for your test Wednesday October 2nd