Chapter 13: Measuring the Economy's Performance

Ch 13 measuring_the_economys_performance from jtoma84

What exactly is GDP?

Understanding the GDP Review/Quiz

Components of the GDP

II. Solving for CPI/Inflation Rate

Another way to put this is: (year 2 / year 1) * 100 = CPI

Therefore... if your total cost of basket in base year is $830 and the total cost of the year 2 basket was $1,015 your CPI would be 122.

HOW???

Well... 

1. (y2/y1)*100

2. (1,015/830)*100 = 122

3. CPI = 122

Next you need the inflation %...

The easy way to do it is to subtract 100 from the CPI, since 100 is the standard you always multiply with in order to calculate CPI.

So the inflation rate if a CPI is 122 is 22% (122-100)

Or the longer formula is:

Now for the tricky part... How would you figure out the Market Basket if you had multiple prices and quantities of goods?

You would need to understand the Measurement of Price Changes.

III. Measurement of Price Changes.

Let's say that in New Jersey, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices and quantities produced of these goods in 1980, 1990, and 1991:

	1980		1990		1991
	P	Q	P	Q	P	Q
Popcorn	1.00	500	1.00	600	1.05	590
Movie Shows	5.00	300	10.00	200	10.50	210
Diet Drinks	0.70	300	0.80	400	0.75	420

P = Price

Q = Quantity

Note: The quantities (Q) in the table above are not used in answering the questions below. These would be used, however, to calculate both GDP and the GDP deflator. (The GDP deflator is the price index associated with GDP, where the bundle of goods under consideration is the aggregate output of the economy. It is used to convert between nominal and real GDP.)

a) A "market bundle" for a typical family is deemed to be 5 popcorn, 3 movie shows, and 3 diet drinks. Compute the consumer price index (CPI) for each of the three years, using 1980 as the base year.

      The consumer price index for 1980 is 100.  This is easily seen:

CPI80 =cost of buying the market bundle in 1980 / cost of buying the market bundle in 1980 * 100

Which would be:
(5×1.00)+(3×5.00)+(3×0.70)/(5×1.00)+(3×5.00)+(3×0.70) * 100
CPI = 100

The consumer price index for 1990 and 1991, respectively, is:

90. CPI90  = cost of buying the market bundle in 1990 / cost of buying the market bundle in 1980 * 100 
    CPI90 = 169.2
    

90. CPI91 =  cost of buying the market bundle in 1991/cost of buying the market bundle in 1980 * 100
    

90. CPI91 - 176.5 
    
    
    
    b) What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (a)?
    The rate of inflation equals the percentage change in the price index from 1990 to 1991. This is: 4.3%