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Chapter 20: Problem 1

Briefly describe the three major measures of the price level.

Short Answer

Expert verified
The three major measures of the price level are the Consumer Price Index (CPI) which examines the weighted average of prices of a basket of consumer goods and services, the Producer Price Index (PPI) which measures average changes in selling prices from the sellers' perspective, and the Gross Domestic Product deflator (GDP deflator) a comprehensive measure reflecting the prices of all goods and services produced by an economy.

Step by step solution

01

Define Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The CPI is used to assess price changes associated with the cost of living.
02

Define Producer Price Index (PPI)

The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. It is a useful forecasting tool for inflationary pressures in the economy.
03

Define Gross Domestic Product deflator (GDP deflator)

The Gross Domestic Product deflator (GDP deflator) is a measure of the price level of all domestically produced final goods and services in an economy. It is different from CPI and PPI as it isn't based on a fixed basket of goods and services. The GDP deflator reflects the prices of all goods and services produced by an economy, giving a more comprehensive measurement.

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Most popular questions from this chapter

(Related to the Don't Let This Happen to You on page 681 ) An article in the Wall Street Journal asked "How can inflation be low when everything is so expensive?" The article also noted that "the CPI shows that prices are the highest they've ever been." Is there a contradiction between a low inflation rate as measured by the CPI and the observations that prices are "the highest they've ever been" and everything is "so expensive"? Briefly explain.

The headline on an article in the Wall Street Journal was "Why Ice Cream Is More Important Than Bacon When Tracking Inflation." Considering how the CPI is constructed, why would ice cream be more important than bacon in calculating inflation?

What is the natural rate of unemployment? What is the relationship between the natural rate of unemployment and full employment?

(Related to the Apply the Concept on page 688 ) During the late nineteenth century in the United States, many farmers borrowed heavily to buy land. During most of the period between 1870 and the mid-1890s, the United States experienced mild deflation: The price level declined each year. Many farmers engaged in political protests during these years, and deflation was often a subject of their protests. Explain why farmers would have felt burdened by deflation.

(Related to the Apply the Concept on page 688 ) During the spring of \(2015,\) the United Kingdom experienced a brief period of deflation. According to an article in the Wall Street Journal, "The U.K.'s history of sticky and hardto- control inflation suggests that a short period of falling prices will be taken as a reprieve for consumers, not as a signal to defer purchases." Why might consumers see deflation as a "signal to defer purchases"? Shouldn't lower prices cause consumers to buy more, not less? Briefly explain.
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