Flashcards in Discovery Unit 20 Glossary Deck (19):
A general and ongoing rise in prices in an economy.
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.
Consumer Price Index
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.
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ﾒ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ﾒs true cost of living because it doesnﾒt take into account that the person can substitute goods according to changes in their relative prices.
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.
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ﾗbut cell phones werenﾒ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.
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).
International Price Index
Price index the Bureau of Labor Statistics (BLS) calculates. Based on the prices of merchandise that is exported or imported.
Employment Cost Index
Price index the Bureau of Labor Statistics (BLS) calculates. Measures wage inflation in the labor market.
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.
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.
Period of severe negative inflation.
Extremely high rates of inflation.
Refers to the number that is actually announced at a particular time for any economic statistic.
Refers to an economic statistic after it has been adjusted for inflation.
real interest rate
The nominal rate of interest with inflation subtracted out. Represents how much in additional buying power a lender or investor receivesﾗor alternatively,
how much a borrower or supplier of financial capital has to pay. Real Interest Rate = Nominal Interest RateﾖInflation Rate.
Category of costs of inflation to a society. Increased costs of transactions caused by inflation.
Category of costs of inflation to a society. They are the costs of changing published prices.