GPD and Changes in Price Level Chapter 13, Section 2

Cover Story “Eyes on the Price” (pg. 350)  Inflation is a rise in the general price level Important to keep track of because it distorts the economic figures that we keep  Compare Figure 13.1 (pg. 342) and 13.4 (pg. 351) What is the difference?

Constructing a Price Index  Price index is a statistical series that can be used to measure changes in prices over time (specific product or range of products)

How do you construct a price index? (pg. 352, Figure 13.5) 1. Select a base year – a year that serves as the basis of comparison for other years 2. Select the market basket – a representative selection of commonly purchased goods and services 3. Record price of each item into market basket 4. Total the prices

3 Major Price Indexes Consumer Price Index Producer Price Index Implicit GDP Price Deflator 80,000 items in 365 categories Computed monthly 100,000 commodities Computed monthly Average levels of all goods and services in the economy Base year prices 1982 base year 1996 base year Computed monthly Computed quarterly 28 separate indices across the nation Subcategories (farm products, fuels, chemicals, rubber, pulp & paper, processed foods Includes all items included in the GDP

Real vs. Current GDP  Current GDP – not adjusted to remove the effects of inflation  Real GDP – distortions of inflation have been removed (GDP in constant dollars) what the GDP would have been if prices did not change from what they were in the base year

Converting GDP into Real Dollars  GDP = (GDP in current dollars/implicit GDP price deflator) x100

Comparing GDP in Different Years Use the same equation but substitute a different year

Homework Chapter 13 Questions #6, 8-13

Computing a Price Index and Calculating Inflation (Worksheet)