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

ProducerPrice Index

Implicit GDP Price Deflator

80,000 items in 365 categoriesComputed monthly

100,000 commoditiesComputed monthly

Average levels of all goods and services in the economy

1982-1984Base year prices

1982 base year 1996 base year

Computed monthly 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)