#06.01 -- Consumer Price Index (narrated)

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Chapter 6 -- Macroeconomic Fundamentals

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Video #06.01 Consumer Price Index

Consumer Price Index:

Consumer Price Index Specific Content Components: Demonstrate how to calculate Consumer Price Index using a market basket of goods and services. Calculate price level, inflation, and deflation using the Consumer Price Index. Use the Consumer Price Index to calculate real dollars from nominal dollars in order to better compare value at different points in time.

Prices:

Prices Price Level: Weighted average of the prices of all good & services Price Index: A measure of the price level Inflation: An percentage change increase in the price level Deflation: A percentage change decrease in the price level Consumer Price Index (CPI): The weighted average of prices of a specific set of goods and services – “a market basket” – purchased by a typical household.

Computing the Consumer Price Index:

Computing the Consumer Price Index

Consumer Price Index 1920-2010:

Consumer Price Index 1920-2010

Consumer Price Index 1983-2012:

Consumer Price Index 1983-2012 Year Annual 1983 99.6 1984 103.9 1985 107.6 1986 109.6 1987 113.6 1988 118.3 1989 124.0 1990 130.7 1991 136.2 1992 140.3 1993 144.5 1994 148.2 1995 152.4 1996 156.9 1997 160.5 Year Annual 1998 163.0 1999 166.6 2000 172.2 2001 177.1 2002 179.9 2003 184.0 2004 188.9 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 2011 224.9 2012 229.6

Calculating Percentage Change in Prices:

Calculating Percentage Change in Prices In 2005 the CPI was 195.3; in 2006 the index was 201.6. What was the percentage change in prices from 2005-06? (201.6 – 195.3) / 195.3 * 100 = 3.23% What does this price change indicate? The rate of inflation between 2005 and 2006.

Nominal and Real Income:

Nominal and Real Income Nominal Income: The current-dollar amount of a person’s income. Real Income: Nominal income adjusted for price changes. Income old year Income new year ----------------- = ------------------- CPI old year CPI new year

David’s first teaching job:

David’s first teaching job I earned $364/month at my first teaching job in 1993. What’s my salary in 2005 dollars? $364*195.3 / 144.5 = $491.97 per month $5,903.60 annually

Consumer Price Index:

Consumer Price Index Specific Content Components: Demonstrate how to calculate Consumer Price Index using a market basket of goods and services. Calculate price level, inflation, and deflation using the Consumer Price Index. Use the Consumer Price Index to calculate real dollars from nominal dollars in order to better compare value at different points in time.

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