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Measuring Inflation and Prices

Measuring Inflation and Prices. Consumer Price Index (CPI)– U and R GDP Deflator For deriving “Real GDP” Wholesale Price Index (WPI) Producer Price Index (PPI) Purchases by manufacturers Purchasing Power Parities For International Comparisons.

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Measuring Inflation and Prices

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  1. Measuring Inflation and Prices • Consumer Price Index (CPI)– U and R • GDP Deflator • For deriving “Real GDP” • Wholesale Price Index (WPI) • Producer Price Index (PPI) • Purchases by manufacturers • Purchasing Power Parities • For International Comparisons

  2. Bureau of Labor Statistics:Consumer Price Index (U) • cost of a market basket of goods purchased by a typical urban consumer. • Used to adjust poverty levels, social security benefits, tax rates…. • Overestimates inflation by 1.1 per year

  3. How CPI Overestimates inflation • Substitution effect: • When prices increase, we switch to other items • Changes in Quality of the product • i.e., Computers • New Outlets (Wal Mart) • CPI measures average prices at many outlets, but consumer buy more where the price is cheaper

  4. Consequences of CPI overestimates • Overestimates of Poverty rates • Higher Cost of Living Adjustments to wages and Social Security benefits • Tax Brackets raised higher: Lower Tax Rates

  5. Measuring Unemployment(Bureau of Labor Statistics Monthly Survey)

  6. Calculating Unemployment Rates • Population in Civilian Labor Force:Civilians working or looking for work • Unemployment Rate = % of Labor Force looking for Work

  7. Problems with Unemployment Rate • Housepersons not counted in labor force (LF) • Discouraged workers not counted in LF • Employees on strike are counted Employed • Part time workers looking for Full time work are counted Employed • Armed Services Personnel not counted in LF

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