Econ Notes: CPI and Inflation


Consumer Price Index (CPI)

(Cost of Market Basket in a Given Year / Cost of Market Basket in a Base Year) x 100
This formula can also be used to measure the cost of the market basket of goods of a typical urban American family (welfare is excluded)

Inflation
-Inflation is a general rise; a significant drop is called hyper-inflation.
-Deflation is a fall of price level
-*Real GDP is adjusted for inflation*
-The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year. After inflation, your dollar can't buy the same goods it could beforehand.

Rate of Inflation([CPI2 - CPI1 ] / CPI1) x 100

  • CPI 1 = old CPI
  • CPI 2 = new CPI
Types of Inflation
  1. Cost-Push Inflation
    • higher production cost increases prices
      • ex: higher wages, taxes, or cost of imports force companies to increase prices in order to maintain profit margins.
      • ex: lower crop production due to bad weather could cause prices on such crops to rise
    • usually results in a supply shock
  2. Demand-Pull Inflation
    • too many dollars chasing too few goods
    • demand grows faster than supply, causing prices to increase
      • ex: if concert prices are only $20 and there is a high demand, the price will go up
  3. Political Panics
    • two causes: recession and depression
Who Inflation Hurts/Helps


2 comments:

  1. Hey Antonette! Although your notes are great, your missing just a couple of things so you should include the following:
    The formula for market baskets is also used to
    -Measure the cost of the market basket of goods of a typical urban American family (Excluded:welfare, people who recieve help from the govt)
    You should also include examples of inflation such as:
    (Ex: Price of dish increase, less frequency of customer visits)
    (Ex: Gas price changes)
    Finally you're missing one small tidbit of info regarding inflation.
    A significant drop is considered hyper inflation.
    Hooe this helps!

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    Replies
    1. Thank you for your feedback! I updated the post and added some examples :)

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