| 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 period’s price level - Previous period’s price level)/Previous Period’s 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. |