Lecture 2 Flashcards
(16 cards)
What is menu costs?
the cost of price adjustment
A term derived from a restaurant’s cost of printing a new menu
- Include the cost of deciding on new prices, price lists and catalogues
- Cost of advertising new prices
- During hyperinflations, menu costs are incurred on a daily, or sometimes even
hourly, basis
What is shoe leather costs?
the resources wasted when inflation encourages people to reduce their money holdings
What is real wage?
the wage rate divided by the price level
What is real income?
income divided by the price level.
What is Industrial Producer Price Index (IPPI)?
similar to the CPI, but measures changes in the prices of goods purchased by producers
What is core inflation?
Core inflation removes volatile goods from the calculation such as food and energy prices the tend to fluctuate frequently
What is price index?
The cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base year
What is a market basket?
A hypothetical set of consumer purchases of goods and services
What is Gross National Product (GNP)?
The market value of all final goods/services produced in a given time period by the citizens of a country
Whereas GDP is defined based on where the production takes place, GNP is based on who produces the goods/services
E.g. profits generated by Tim Hortons in Chicago, IL is not included in Canadian GDP but is included in Canadian GNP and U.S. GDP
What is nominal GDP?
The value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced
What is GDP deflator?
A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
What is aggregate price level?
A measure of the overall level of prices in the economy
Why do economists place focus on GDP?
Richer countries on average have a higher well-being than poor countries.
But money matters less as you grow richer. As GDP rises, the average gain in life satisfaction per extra dollar gets smaller and smaller
How do we calculate real GDP
We ask: How much would GDP have gone up if prices had not changed?
To answer this question, we need to find the value of output in year 2 expressed in year 1 prices.
Here we are taking inflation out of the equation in order to compare GDP across years
What are the 5 steps to calculate CPI?
- Determine the basket. Which prices are most important to the typical urban consumer?
- Find the prices of each of the goods and services in the basket for each point in time.
- Compute the baskets’ cost. Same basket at different times.
- Choose a base year and compute the index.
- Compute the CPI inflation rate.
Does Inflation make people poorer?
Not always.
The rise in prices in Canada since the 1970s hasn’t made the country poorer because Canada has also had incomes increase by a higher amount
inflation makes people poorer only when price levels increase more than incomes.
