Presentation on theme: "CIA4U0 Analyzing Current Economic Issues"— Presentation transcript:
1 CIA4U0 Analyzing Current Economic Issues Chapter 9: An Introduction to MacroeconomicsTopic 4: Measuring Price Stability: The Consumer Price Index (CPI)P
2 Consumer Price Index Topic Overview IntroductionCalculating the CPIUsing the CPILimitations of the CPIReal GDP
3 Consumer Price Index Introduction One main goal of the federal government is to maintain price stabilityGood for business, good for people, good for tradeIf prices go up but income stays the same "real income" goes downInflation-the persistent rise in the general level of prices
4 Consumer Price Index Calculating the CPI Also calculated by StatsCanMonitors the consumption of over 600 goods and services and their pricesDone in cities across CanadaThere are eight categories from Shelter to Personal CareCategories are weighted according to their relative importanceA formula is used to calculate the CPI-what the basket of 600 goods and services "costs"
5 Consumer Price Index Using the CPI Main purpose is to calculate inflation (I) from one period to anotherI = (CPI2-CPI1)/CPI1 x 100Used to manage pension plans (need to know how much to save up for)Used in contract negotiation to determine pay increasesIndexing-connecting pay or pension increases to increases in the CPI
6 Consumer Price Index Limitations of the CPI Not every household fits the picture created by the "averages"Amount of spendingGoods and services purchasedSize of household/CultureProducts and purchases change over timeThe "basket" needs to be updated periodicallySometimes can't compare year to year
7 Consumer Price Index Real GDP Nominal GDP is based on the total of what we spendIf we spend more than we did last year, how much of that is due to increased spending or just paying more for products because of inflation?Real GDP is calculated using the CPI and takes out any effect that inflation has on measuring GDP growth
8 Consumer Price Index Real GDP Example:Year 1-buy $100 worth of chocolateYear 2-buy $110 worth of chocolate10% increase in Nominal GDP (chocolate)CPI is 4%So Real GDP = Nominal GDP – CPI = 6%(Real process is much more complicated)
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