Title: Macro 23 notes Author: Chrfrhr Pastebin link: http://pastebin.com/dcXgsthr First Edit: Thursday 9th of June 2016 11:41:09 AM CDT Last Edit: Thursday 9th of June 2016 11:41:09 AM CDT Macro 23 notes   The CPI and the cost of living   Economic Goals Job and Unemployment <6% CPI and Inflation <3%   What is Inflation? What is deflation? An increase in the general(average) price level of goods and services a typical American urban household buys each month. A decrease in the general price level of goods and services a typical urban American household buys each month.   Consumer Price Index 1. A measure of the Average of the prices paid by urban consumers for a fixed market basket of consumer goods and services. 2. The BLS calculates the CPI every month. 3. www.bls.gov 4 Each month, BLS employees check the prices of the 80,000 goods and services in the CPI basket in 30 metropolitan areas. 5. Because the CPI measures price changes, it is important that the prices recorded refer to similar market basket of goods. 6. We can use these numbers to compare what a fixd basket of goods costs this month(current year) and what it costs some previous (base year)month. 7. CPI is the most widely reported measure of inflation.   Average prices of market basket of goods is calculated in 1989. Average prices of market basket of similar goods is calculated in 2009.   The base year in this example is 1982-84. The current year in this example is 2011. The CPI is defined to equal 100 for a period called the reference base period(1984) The CPI calculated for the current year, 2011, is 225.54.   COnstructing the CPI Three stages: Selecting the CPI basket Conducting the monthly price survey   CPI= (Cost of CPI basket at current period prices)/(Cost of CPI basket at base period prices)x100   Measuring Iflation Inflation rate The percentage change in the price level from one year to the next.   Sources of Bias in teh CPI -New Goods Bias New goods do a better job than the old ones but cost more The arrival of new goods puts an upward bias into the CPI and its measure of the inflation rate. -Quality Change Bias Better cars and televisions cost more -Commodity substitution bias Substituting one product for another because the one is less expensive(chicken over beef) The CPI basket doesn't change to allow for the effects of substitution between goods. -Outlet substitution bias If prices rise more rapidly, people use discount stores more frequently The CPI basket doesn't change to allow for the effects of outlet substitution.   Two Consequences of the CPI Bias -Distortion of private agreements -Increases in government outlays   Distortion of Private Agreements -Many private agreements, such as wage contracts, are linked to the CPI.   Application of CPI Retirement planning/pension plans Standard of living Purchasing power of your income Inflation rate Pay negotiation/private agreements Union contracts The CPI is used to adjust government obligations 49 million Social Security benefit Payments 27 million receiving food stamps 4 million pensions for retired military personnel, federal/civil servants, and their surviving spouses   The link between GDP, Unemployment, and Inflation When real GDP decreased in the recession, the unemployment rate decreased. A little later, the inflation rate decreased. As real GDP increased back toward potential GDP, the unemployment rate fell toward the natural unemployment rate and the inflation rate increases.