Chapter 13 Outline
II. MEASURING INFLATION
A. The GDP Deflator
1. The GDP deflator is a weighted average of the prices of all final goods and services produced in the economy.
2. The GDP deflator is the broadest based measure of the nation's price level.
a. Because of its comprehensiveness, the GDP deflator is often considered the best measure of the nation's inflation rate.
B. The Consumer Price Index
1. The consumer price index, CPI, is a weighted average of the prices of goods and services purchased by a typical urban household.
2. The CPI is the most widely cited measure of inflation in the United States.
3. Although the CPI is often regarded as a cost of living index, there are several problems with this interpretation.
a. The CPI is not accurate for a household that is atypical.
b. The CPI overstates increases in the cost of living because it is based on a fixed basket of goods and services.
1. This overestimate occurs because households change their buying patterns in response to price changes.
c. The CPI overstates increases in the cost of living because it doesn't fully account for changes in quality.
C. Calculating the Inflation Rate
1. To determine the rate of inflation, the following formula is used: Inflation rate = ((Current periodís price level - Previous periodís price level)/Previous Periodís Price Level)*100.
D. Recent Experience
1. Inflation is a relatively new phenomenon in the United States.
a. Since 1940 the price level has more or less increased steadily.
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