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Flashcards in Chapter 20 Deck (19):
1

Inflation

A general and ongoing rise in prices in an economy.

2

basket of goods and services

Considered by economists when constructing an overall measure that shows inflation in the prices of many different items. Gives greater weight to the items on which people spend more money. The basket will include quantities of the goods and services being purchased that reflect what people actually buy.

3

Consumer Price Index
(CPI)Consumer Price Index
(CPI)

Most commonly cited measure of inflation in the United States. Calculated by government statisticians at the U.S. Bureau of Labor Statistics (BLS) based on the price level of a basket of goods and services that represents the purchases of the average consumer.

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Substitution Bias

Problem to be considered when calculating the Consumer Price Index (CPI). When the price of a good changes, consumers tend to purchase more or less of the product based on the availability of substitutes. As these substitutions occur, the consumer’s actual market basket changes even though the index is based on a fixed market basket. Thus, the rise in the price of a fixed basket of goods over time tends to overstate the rise in a consumer’s true cost of living because it doesn’t take into account that the person can substitute goods according to changes in their relative prices.

5

Quality Bias

Problem to be considered when calculating the Consumer Price Index (CPI). Over time the quality of a product may improve. For example, your new smartphone may have a better camera and more memory than your old one. Part of an increase in the price of your new phone is due to improvements in quality rather than inflation.

6

New Goods Bias

Problem to be considered when calculating the Consumer Price Index (CPI). Although there are new products for people to buy every day, they are only gradually included in the bundle of goods used in the CPI. For example, by 1996, there were more than 40 million cellular phone subscribers in the United States—but cell phones weren’t yet part of the CPI basket of goods. Since these new goods are not immediately included in the CPI market basket, the CPI does not fully reflect actual purchases.

7

Producer Price Index

Price index the Bureau of Labor Statistics (BLS) calculates. Based on prices paid for supplies and inputs by producers of goods and services. Can be broken down into price indices for different industries, commodities, and stages of processing (such as finished goods, intermediate goods, crude materials for further processing, and so on).

8

International Price Index

Price index the Bureau of Labor Statistics (BLS) calculates. Based on the prices of merchandise that is exported or imported.

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Employment Cost Index

Price index the Bureau of Labor Statistics (BLS) calculates. Measures wage inflation in the labor market.

10

GDP deflator

Price index the Bureau of Labor Statistics (BLS) calculates. It includes all the components of GDP (that is, consumption plus investment plus government plus net exports). Can be calculated as: Nominal GDP/Real GDP*100=GDP deflator.

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Personal Consumption Expenditure

(PCE) Price index the Bureau of Labor Statistics (BLS) calculates. It is like the gross domestic product (GDP) deflator, except that it is
based only on the consumption portion of GDP.(PCE) Price index the Bureau of Labor Statistics (BLS) calculates. It is like the gross domestic product (GDP) deflator, except that it is
based only on the consumption portion of GDP.

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deflation

Period of severe negative inflation.

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hyperinflation

Extremely high rates of inflation.

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nominal value

Refers to the number that is actually announced at a particular time for any economic statistic.

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real value

Refers to an economic statistic after it has been adjusted for inflation.

16

real interest rate

The nominal rate of interest with inflation subtracted out. Represents how much in additional buying power a lender or investor receives—or alternatively,
how much a borrower or supplier of financial capital has to pay. Real Interest Rate = Nominal Interest Rate–Inflation Rate.The nominal rate of interest with inflation subtracted out. Represents how much in additional buying power a lender or investor receives—or alternatively,
how much a borrower or supplier of financial capital has to pay. Real Interest Rate = Nominal Interest Rate–Inflation Rate.

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Shoe-Leather Costs

Category of costs of inflation to a society. Increased costs of transactions caused by inflation.

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Menu Costs

Category of costs of inflation to a society. They are the costs of changing published prices.

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Unit-of-Account Costs

Category of costs of inflation to a society. Costs resulting from the way in which inflation makes money a less reliable unit of measurement.