Ch06 Ppt Mankiw Macro9Ce 2024 PDF

MEASURING THE COST OF LIVING Chapter 6 Mankiw video Copyright © 2024 Cengage Learning Ltd. 6-1  WHAT IS AN INDEX?  In statistics an index is a composite statistic – a measure of changes in a representative group of individual data points.  Fiat Currency  Gold...

MEASURING THE COST OF LIVING Chapter 6 Mankiw video Copyright © 2024 Cengage Learning Ltd. 6-1  WHAT IS AN INDEX?  In statistics an index is a composite statistic – a measure of changes in a representative group of individual data points.  Fiat Currency  Gold Copyright © 2024 Cengage Learning Ltd. 6-2  MEASURING THE COST OF LIVING  This chapter examines how economists measure the overall cost of living. The consumer price index is used to monitor changes in the cost of living over time.  When the consumer price index rises, the typical family must spend more dollars to maintain the same standard of living.  Economists use the term inflation to describe a situation in which the economy’s overall price level is rising.  The inflation rate is the percentage change in the price 6 level from the previous period. Copyright © 2024 Cengage Learning Ltd. 5-3  WHAT CAUSES INFLATION?  Discussion. Copyright © 2024 Cengage Learning Ltd. 6-4  PROBLEMS OF INFLATION  1. Inflation Erodes Purchasing Power  2. Inflation Impacts Lower-Income Consumers  3. Inflation Keeps Deflation at Bay  4. Inflation Feeds on Itself When It's High  5. Inflation Raises Interest Rates  6. Inflation Lowers Debt Service Costs Copyright © 2024 Cengage Learning Ltd. 6-5  7. Inflation Lifts Growth & Employment in the Short Term  8. Inflation Can Cause Painful Recessions  9. Inflation Hurts Bonds & Growth Stocks  10. Inflation Boosts Real Estate, Energy, & Value Stocks Copyright © 2024 Cengage Learning Ltd. 6-6  THE CONSUMER PRICE INDEX  Consumer price index (CPI) is the overall measure of the cost of the goods and services bought by a typical consumer. 6-1 Copyright © 2024 Cengage Learning Ltd. 6-7  THE CONSUMER PRICE INDEX “A NICKEL AIN’T WORTH A DIME ANYMORE,” HOW THE CONSUMER PRICE INDEX IS CALCULATED  Every month, Statistics Canada computes and reports the CPI.  It uses data on the prices of more than 600 different goods and services.  To see how these statistics are constructed, a 6- simple Copyright © 2024 Cengage Learning Ltd. 6-8 1a  THE CONSUMER PRICE INDEX FIVE STEPS TO COMPUTING THE CPI AND THE INFLATION RATE 1. Determine the basket to determine which prices are most important to the typical consumer. 2. Find the prices of each of the goods and services in the basket for each point in time. 3. Compute the basket’s cost at different 6- 1a times. Copyright © 2024 Cengage Learning Ltd. 6-9  THE CONSUMER PRICE INDEX FIVE STEPS TO COMPUTING THE CPI AND THE INFLATION RATE (CONT’D) 4. Choose a base year and compute the index. 5. Compute the inflation rate. 6- Copyright © 2024 Cengage Learning Ltd. 6-10 1a  THE CONSUMER PRICE INDEX  Statistics Canada calculates several other price indexes.  For each province and territory and for 19 cities across Canada.  For some narrow categories of goods and services (such as food, clothing, and shelter).  “CORE” INFLATION: a measure of the underlying trend in inflation. 6- Copyright © 2024 Cengage Learning Ltd. 6-11 1a  TABLE 6.1 Calculating the Consumer Price Index and the Inflation Rate: An Example 6- Copyright © 2024 Cengage Learning Ltd. 6-12 1a  FY What Is in the CPI’s Basket? I 6- Copyright © 2024 Cengage Learning Ltd. 6-13 1b  THE CONSUMER PRICE INDEX PROBLEMS IN MEASURING THE COST OF LIVING  The CPI is not a perfect measure of the cost of living. 1. Commodity substitution bias 2. Introduction of new goods 3. Unmeasured quality change  Taken together, these sources of bias cause the 6- CPI to overstate the cost of living by 0.5 Copyright © 2024 Cengage Learning Ltd. 6-14 1b  BANK OF CANADA  Bank of Canada Copyright © 2024 Cengage Learning Ltd. 6-15  FY 20 Years of Price Changes in Canada I 6- Copyright © 2024 Cengage Learning Ltd. 6-16 1b  THE CONSUMER PRICE INDEX THE GDP DEFLATOR VERSUS THE CONSUMER PRICE INDEX  Economists and policymakers monitor both the GDP deflator and the CPI to gauge how quickly prices are rising.  Usually, these two statistics tell a similar story.  Two important differences can cause them to diverge:  The GDP deflator reflects prices of goods and services produced domestically. 6-  The GDP deflator Copyright 1c compares theLearning © 2024 Cengage price Ltd.of currently produced 6-17  FIGURE 6.3 Two Measures of Inflation 6- Copyright © 2024 Cengage Learning Ltd. 6-18 1b  Active Learning Calculate the CPI CPI basket: {10 kg beef, 20 kg price of price of chicken} beef chicken The CPI basket cost $120 in 2021, the 2021 $4 $4 A. Compute base year. the CPI in 2022. 2022 $5 $5 B. What was the CPI inflation rate from 2022 to 2023? 2023 $9 $6 6-1 Copyright © 2024 Cengage Learning Ltd. 6-19  Active Learning Calculate the CPI - Answers A. Compute the CPI in 2022. Cost of CPI basket in 2022 = ($5 × 10) + ($5 × 20) = $150 CPI in 2022 = 100 × ($150/$120) = 125 6-1 Copyright © 2024 Cengage Learning Ltd. 6-20  Active Learning Calculate the CPI - Answers B. What was the CPI inflation rate from 2022 to 2023?of CPI basket in 2023 Cost = ($9 × 10) + ($6 × 20) = $210 CPI in 2023 = 100 × ($210/$120) = 175 CPI inflation rate 2023 / 2022 = (175 – 125)/125 = 40% 6-1 Copyright © 2024 Cengage Learning Ltd. 6-21  An Overview of Canada’s Consumer Price Index (CPI) https://www.youtube.com/watch?v=qfKmJe3CK6E The Consumer Price Index and Your Experience of Price Change https://www.youtube.com/watch?v=U0xDcqE-zNs 6-1 Copyright © 2024 Cengage Learning Ltd. 6-16  Quick Quiz 1. The CPI measures 4. Because consumers can approximately the same sometimes substitute economic phenomenon as cheaper goods for those that have risen in price, a. nominal GDP. a. the CPI overstates b. real GDP. inflation. c. the GDP deflator. b. the CPI understates inflation. d. the unemployment rate. c. the GDP deflator overstates inflation. d. the GDP deflator understates inflation. 6-1 Copyright © 2024 Cengage Learning Ltd. 6-23 CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION  The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different points in time. 6-2 Copyright © 2024 Cengage Learning Ltd. 6-24 CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION DOLLAR FIGURES FROM DIFFERENT TIMES  Was the 1957 price of 9.5 cents per litre high or low compared with the 2021 price of gas ($1.30 per litre)?  To compare the 1957 price of gas with the 2021 price, we need to inflate the price of 9.5 cents per litre to turn 1957 dollars into 2021 dollars. 6- Copyright © 2024 Cengage Learning Ltd. 6-25 2a  FY The Bank of Canada’s Inflation Calculator I https://www.bankofcanada.ca/rat es/related/inflation-calculator/ A basket of goods and services that cost $100 in 1914 would cost how much in 1973? In 1983? In 1993? In 2003? In 2022? 6- Copyright © 2024 Cengage Learning Ltd. 6-26 2a  case Mr. Index Goes to stud Hollywood y  MCQ: What is the most popular movie of all time? What is the most popular movie of all time? A. Avatar B. Titanic C. Star Wars D. Gone with the Wind 6- Copyright © 2024 Cengage Learning Ltd. 6-27 2a CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION INDEXATION  INDEXATION: the automatic correction of a dollar amount for the effects of inflation by law or contract  COLA (cost-of-living allowance) automatically raises the wage when the CPI raises 6- Copyright © 2024 Cengage Learning Ltd. 6-28 2b CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION REAL AND NOMINAL INTEREST RATES  Interest rates involve comparing amounts of money at different points in time.  To fully understand interest rates, knowing how to correct for the effects of inflation is important.  Suppose you make a deposit of $1000 in a bank account that pays interest at a rate of 10 percent per year.  After one year, that bank account now contains $1100 (= principal of $1000 + interest of $100). 6- 2c  Are you actually wealthier after one year? Copyright © 2024 Cengage Learning Ltd. 6-29 CORRECTING ECONOMIC VARIABLES FOR THE EFFECTS OF INFLATION REAL AND NOMINAL INTEREST RATES (CONT’D)  NOMINAL INTEREST RATE: the interest rate that is usually reported without a correction for the effects of inflation  REAL INTEREST RATE: the interest rate that is corrected for the effects of inflation 6- Copyright © 2024 Cengage Learning Ltd. 6-30 2c  case Interest Rates in the Canadian stud Economy y What is the most popular movie of all time? 6- Copyright © 2024 Cengage Learning Ltd. 6-31 2c  Quick Quiz 5. If the CPI is 200 for the 6. You deposit $2000 in a year 1980 and 300 today, savings account, and a year then $600 in 1980 has the later you have $2100. same purchasing power as Meanwhile, the CPI rises ___ has today. from 200 to 204. In this case, the nominal interest a. $400 rate is ___ percent, and the real interest rate is ___ b. $500 percent. c. $700 a. 1; 5 d. $900 b. 3; 5 c. 5; 1 d. 5; 2 6-2 Copyright © 2024 Cengage Learning Ltd. 6-32  MIDTERM OCTOBER 11TH  9am-10 lecture  10 am midterm begins goes to 1130  What to bring  Covers chapters 1-6  20 MC, 5 short answer 3 problems /60.  What to study? Copyright © 2024 Cengage Learning Ltd. 6-33  EXAMPLES MC An economy's gross domestic product is a. the excess of spending over income. b. the excess of income over spending. c. total income and total spending. d. total income times total spending. Copyright © 2024 Cengage Learning Ltd. 6-34  EXAMPLES MC Which of the following is an example of a positive statement? a. Every Canadian should have equal access to health care. b. Canada should have lower tax rates for wealthier Canadians. c. Canada should cut back on its use of carbon-based fuels such as coal and oil. d. Increasing the minimum wage results in more unemployment. Copyright © 2024 Cengage Learning Ltd. 6-35  EXAMPLES MC What will cause an increase in the price of homes and a decrease in the purchase of homes? a. A rightward shift of the demand curve for housing. b. A rightward shift of the supply curve for housing. c. A leftward shift of the demand curve for housing. d. A leftward shift of the supply curve for housing. Copyright © 2024 Cengage Learning Ltd. 6-36  EXAMPLES MC If skis and ski boots are complementary goods, what is most relevant when the price of skis decreases? a. decreased demand for skis b. decreased demand for ski boots c. no effect on the demand for skis d. increased demand for ski boots Copyright © 2024 Cengage Learning Ltd. 6-37  EXAMPLES MC Carol has spent $2000 purchasing and repairing an old car, which she expects to sell for $2400. She discovers that she needs an additional repair, which will cost $400. She can sell the car as it is now for $2000. What should she do? a. It doesn’t matter which action she takes; the outcome is the same either way. b. She should sell the car now for $2000. c. She should never sell something for less than it cost. d. She should complete the repairs and sell the car. Copyright © 2024 Cengage Learning Ltd. 6-38  EXAMPLE SHORT ANSWER 1. How can governments improve market outcomes? 2. What is an efficient outcome on the production possibilities frontier? 3. When does a production possibilities frontier shift outward? 4. What does opportunity cost have to do with comparative advantage? 5. Explain the GDP deflator. Copyright © 2024 Cengage Learning Ltd. 6-39  EXAMPLE SHORT ANSWER 6. List the three major problems in using the CPI as a measure of the cost of living. 7. A country reported a nominal GDP of $85 billion in 2020 and $100 billion in 2019 and reported a GDP deflator of 100 in 2020 and 105 in 2019. What happened to real output and prices from 2019 to 2020? Copyright © 2024 Cengage Learning Ltd. 6-40  EXAMPLE PROBLEMS  A hypothetical economy produces only two items: maple syrup and trips to a local tourist attraction. Calculate nominal GDP, real GDP, and the GDP deflator, and fill in the corresponding columns in theGDP Year Price of Price of Quantit Numbe Nomina Real following table: Maple Trips y of r of l GDP GDP Deflato Syrup Maple Trips r Syrup 1 $11 $250 300 425 2 $13 $258 310 570 3 $12 $260 324 550 4 $14 $262 410 580 Copyright © 2024 Cengage Learning Ltd. 6-41  Price of Quantity GDP Price of Number Nomina Real Year Maple of Maple Deflator Trips of Trips l GDP GDP Syrup Syrup (%) $109 $109 1 $11 $250 300 425 1.000 550 550 $151 $145 2 $13 $258 310 570 1.036 090 910 $146 $141 3 $12 $260 324 550 1.041 888 064 $157 $149 4 $14 $262 410 580 1.055 700 510 Copyright © 2024 Cengage Learning Ltd. 6-42 Five years ago, when you took up your current job, your wage was $20 an hour. Now it is $22. Suppose you do not know the CPIs, but only the inflation rates for the past 5 years: 2.5, 1.9, 2.2, 2.7, and 3.1 percent. a) In real terms, do you now earn more or less than 5 years ago? b) How much was the inflation rate over the 5-year period? c) If the CPI was 112.5 in the first year, how much is it today? Copyright © 2024 Cengage Learning Ltd. 6-43 This question deals with demand and supply and refers you to the table below (next slide). a. Given the table, graph the demand and supply curves for flashlights. Make certain to label equilibrium price and equilibrium quantity. b. What is the equilibrium price and equilibrium quantity? c. Suppose the price is currently at $5. What problem would exist in the economy? What would you expect to happen to price? Show this on your graph. d. Suppose the price is currently $2. What problem exists in the economy? What would you expect to happen to price? Show this on your graph. Copyright © 2024 Cengage Learning Ltd. 6-44 MARKET FOR FLASHLIGHTS Copyright © 2024 Cengage Learning Ltd. 6-45