CIA4U0 Analyzing Current Economic Issues Chapter 9: An Introduction to Macroeconomics Topic 4: Measuring Price Stability: The Consumer Price Index (CPI) P 207-212

Consumer Price Index Topic Overview Introduction Calculating the CPI Using the CPI Limitations of the CPI Real GDP

Consumer Price Index Introduction One main goal of the federal government is to maintain price stability Good for business, good for people, good for trade If prices go up but income stays the same "real income" goes down Inflation-the persistent rise in the general level of prices

Consumer Price Index Calculating the CPI Also calculated by StatsCan Monitors the consumption of over 600 goods and services and their prices Done in cities across Canada There are eight categories from Shelter to Personal Care Categories are weighted according to their relative importance A formula is used to calculate the CPI-what the basket of 600 goods and services "costs"

Consumer Price Index Using the CPI Main purpose is to calculate inflation (I) from one period to another I = (CPI2-CPI1)/CPI1 x 100 Used to manage pension plans (need to know how much to save up for) Used in contract negotiation to determine pay increases Indexing-connecting pay or pension increases to increases in the CPI

Consumer Price Index Limitations of the CPI Not every household fits the picture created by the "averages" Amount of spending Goods and services purchased Size of household/Culture Products and purchases change over time The "basket" needs to be updated periodically Sometimes can't compare year to year

Consumer Price Index Real GDP Nominal GDP is based on the total of what we spend If 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

Consumer Price Index Real GDP Example: Year 1-buy $100 worth of chocolate Year 2-buy $110 worth of chocolate 10% increase in Nominal GDP (chocolate) CPI is 4% So Real GDP = Nominal GDP – CPI = 6% (Real process is much more complicated)