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Economics. Chapter 2 General Price Level. General Price Level. General price level Weighted average of prices of all goods and services. Shown by different price indexes Price index A figure showing the price level of the same basket of goods and services. Base period vs. specific period

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economics

Economics

Chapter 2

General Price Level

general price level
General Price Level
  • General price level
    • Weighted average of prices of all goods and services.
    • Shown by different price indexes
  • Price index
    • A figure showing the price level of the same basket of goods and services.
    • Base period vs. specific period
    • At base year, always set at 100
consumer price index cpi
Consumer Price Index (CPI)
  • Price level of goods and services generally consumed by household.
consumer price index cpi1
Consumer Price Index (CPI)
  • HK Statistics: Base year = 2004-2005
the implicit price deflator of gdp
The implicit price deflator of GDP
  • Simply: GDP deflator
  • Measure the price change of all types of goods included in GDP.
  • Formula:
coverage
Coverage
  • CPI
    • Products consumed by household
    • Fixed basket of goods and services. (Same for diff. yrs)
    • Imports , Exports 
    • Capital goods 
  • GDP deflator
    • All products produced by an economy
    • Counting all GDP components: C + I + G + X - M.
    • Exports , imports 
    • Capital goods (I) 
cpi vs gdp deflator
CPI vs. GDP deflator
  • Aim at
    • CPI
      • Change in the cost of living
      • Amount spent on basic living expenses
    • GDP deflator
      • Purchasing power of money
      • Amount of goods that can be bought with a unit of money
inflation
Inflation
  • Definition:The persistent increase in the general price level.
    • Shown by CPI  continuously.
    • Hong Kong Statistics:

Inflation rate =

deflation
Deflation
  • Definition:
    • The persistent decrease in the general price level.
    • Inflation rate is negative
inflation1
Inflation
  • Given the CPIs of Economy A
    • Find the inflation rate in 2009.
    • Find the inflation rate in 2010.
cpi vs gdp deflator1
CPI vs. GDP deflator
  • Aim at
    • CPI
      • Change in the cost of living
      • Amount spent on basic living expenses
    • GDP deflator
      • Purchasing power of money
      • Amount of goods that can be bought with money
purchasing power
Purchasing power
  • In 2009
    • A hamburger = $10
      • i.e. You can buy a hamburger if you got a $10 note
  • In 2010
    • A hamburger = $12
      • i.e. You can’t buy a hamburger with a $10 note
  • The purchasing power of the $10 note is lowered
  • Nowadays, the 10 cents coins have very little purchasing power
cpi overestimation
CPI - Overestimation

Substitution bias:

CPI  Basket (Good A)

If Price of Good A  Choose Good B (substitute)

Although CPI (Good A), people are not fully affected

Same living standard

CPI overestimate the increase in price level

cpi overestimation1
CPI - Overestimation
  • Quality improvement:
    • Products with high technology (e.g. new mobile phone)
    • Buy same amount (same expense)  better enjoy

or

    • Buy the same old model (less expense)  same enjoy
    • CPI can’t reflect the change in enjoyment
which price index is better textbook p 60 61
Which price index is better? (Textbook p.60-61)

a. Calculate the inflation rates of 2004 and 2005.

Inflation rate =

which price index is better textbook p 60 611
b. Describe the changes in inflation rates and cost of living with reference to the GDP deflator and Composite CPI.

Base on GDP deflator:

a ______ inflation rate in 2004 suggests a ________ in the cost of living.

a ______ inflation rate in 2005 showing that the cost of living__________________.

Base of Composite CPI:

a ______ inflation rate in 2004 suggests a ________ in the cost of living.

a ______ inflation rate in 2005 suggests a ________ in the cost of living.

Which price index is better? (Textbook p.60-61)

negative

decrease

zero

remains unchanged

negative

decrease

positve

increase

which price index is better textbook p 60 612
c. Which index is a better indicator of inflation? Which index is a better indicator of the cost of living?

Inflation refers to ___________________________________________

As the ______________ measure price changes of a large scope of goods, it is better indicator of inflation

Cost of living refers to ___________________________________________

It is affected by price change in _________ goods only.

Therefore, ________ , which includes only _________ goods, is a better indicator of the cost of living.

Which price index is better? (Textbook p.60-61)

A persistent increase in the general price level

GDP deflator

amount spent on basic living expenses

consumer

consumer

CPI

which index is better
Which index is better?
  • GDP deflator
    • Prices change of a large scope of goods
    • Better for measuring inflation
  • CPI
    • Price change of consumer goods
    • Better for indicating living standard