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CIA4U0 Analyzing Current Economic Issues

CIA4U0 Analyzing Current Economic Issues. Chapter 9: An Introduction to Macroeconomics Topic 4: Measuring Price Stability: The Consumer Price Index (CPI) P 207-212. Consumer Price Index Topic Overview. Introduction Calculating the CPI Using the CPI Limitations of the CPI Real GDP.

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CIA4U0 Analyzing Current Economic Issues

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  1. CIA4U0Analyzing Current Economic Issues Chapter 9: An Introduction to Macroeconomics Topic 4: Measuring Price Stability: The Consumer Price Index (CPI) P 207-212

  2. Consumer Price IndexTopic Overview • Introduction • Calculating the CPI • Using the CPI • Limitations of the CPI • Real GDP

  3. Consumer Price IndexIntroduction • One main goal of the federal government is to maintain price stability • Good for business, good for people, good for trade • If prices go up but income stays the same "real income" goes down • Inflation-the persistent rise in the general level of prices

  4. Consumer Price IndexCalculating the CPI • Also calculated by StatsCan • Monitors the consumption of over 600 goods and services and their prices • Done in cities across Canada • There are eight categories from Shelter to Personal Care • Categories are weighted according to their relative importance • A formula is used to calculate the CPI-what the basket of 600 goods and services "costs"

  5. Consumer Price IndexUsing the CPI • Main purpose is to calculate inflation (I) from one period to another • I = (CPI2-CPI1)/CPI1 x 100 • Used to manage pension plans (need to know how much to save up for) • Used in contract negotiation to determine pay increases • Indexing-connecting pay or pension increases to increases in the CPI

  6. Consumer Price IndexLimitations of the CPI • Not every household fits the picture created by the "averages" • Amount of spending • Goods and services purchased • Size of household/Culture • Products and purchases change over time • The "basket" needs to be updated periodically • Sometimes can't compare year to year

  7. Consumer Price IndexReal GDP • Nominal GDP is based on the total of what we spend • If we spend more than we did last year, how much of that is due to increased spending or just paying more for products because of inflation? • Real GDP is calculated using the CPI and takes out any effect that inflation has on measuring GDP growth

  8. Consumer Price IndexReal GDP • Example: • Year 1-buy $100 worth of chocolate • Year 2-buy $110 worth of chocolate • 10% increase in Nominal GDP (chocolate) • CPI is 4% • So Real GDP = Nominal GDP – CPI = 6% • (Real process is much more complicated)

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