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PRINCIPLES OF
MACROECONOMICS
FOURTH CANADIAN EDITION
N. G R E G O R Y M A N K I W
R O N A L D D. K N E E B O N E
K E N N E T H J. M c K ENZIE
NICHOLAS ROWE
PowerPoint® Slides
by Ron Cronovich
Canadian adaptation by Marc Prud’Homme
© 2008 Nelson Education Ltd.
In this chapter, look for the answers to these
questions:
What is the Consumer Price Index (CPI)?
How is it calculated? What’s it used for?
What are the problems with the CPI? How serious are
they?
How does the CPI differ from the GDP deflator?
How can we use the CPI to compare dollar amounts from
different years? Why would we want to do this, anyway?
price of price of
year cost of basket
pizza latte
2004 $10 $2.00 $10 x 4 + $2 x 10 = $60
2005 $11 $2.50 $11 x 4 + $2.5 x 10 = $69
2006 $12 $3.00 $12 x 4 + $3 x 10 = $78
9
A C T I V E L E A R N I N G 1:
Answers
movie text-
tickets books
The basket contains
20 movie tickets 2004 $10 $50
and 10 textbooks.
2005 $10 $60
10
A C T I V E L E A R N I N G 1:
Answers
movie text-
tickets books
The basket contains
20 movie tickets 2004 $10 $50
and 10 textbooks.
2005 $10 $60
11
A C T I V E L E A R N I N G 1:
Answers
movie text-
The basket contains tickets books
20 movie tickets
and 10 textbooks. 2004 $10 $50
2005 $10 $60
C. What is the
inflation rate from 2006 $12 $60
2005-2006?
cost of basket in 2006
= ($12 x 20) + ($60 x 10) = $840
CPI in 2006 = 100 x ($840/$700) = 120
Inflation rate = (120 – 114.3)/114.3 = 5%
12
FYI: What’s in the CPI’s Basket?
Alcoholic
beverages and
tobacco
Recreation, products
education and 3%
reading Food
12% 17%
Health and
personal care
5%
Transportation
Shelter
20%
27%
N o m in al G D P
G D P d eflato r = 1 0 0
R eal G D P
23
A C T I V E L E A R N I N G 2:
Answers
A. Starbucks raises the price of Frappuccinos.
The CPI and GDP deflator both rise.
24
CORRECTING ECONOMIC VARIABLES
FOR THE EFFECTS OF INFLATION
28
A C T I V E L E A R N I N G 3:
Answers
Solution
Convert 1980 salary into “today’s dollars”
$24,000 x (180/90) = $48,000.
After adjusting for inflation, salary is higher today than in
1980.
29
Correcting Variables for Inflation:
Indexation