Using Price Indexes
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The Consumer Price Index and Index Number Purpose W
1 THE CONSUMER PRICE INDEX AND INDEX NUMBER PURPOSE W. Erwin Diewert, Department of Economics, University of British Columbia, Vancouver, B. C., Canada, V6T 1Z1. Email: [email protected] Paper presented at the Fifth Meeting of the International Working Group on Price Indices (The Ottawa Group), Reykjavik, Iceland, August 25-27, 1999; Revised: September, 1999. 1. INTRODUCTION1 “What index numbers are ‘best’? Naturally much depends on the purpose in view.” Irving Fisher (1921; 533). A Consumer Price Index (CPI) is used for a multiplicity of purposes. Some of the more important uses are: · as a compensation index; i.e., as an escalator for payments of various kinds; · as a Cost of Living Index (COLI); i.e., as a measure of the relative cost of achieving the same standard of living (or utility level in the terminology of economics) when a consumer (or group of consumers) faces two different sets of prices; · as a consumption deflator; i.e., it is the price change component of the decomposition of a ratio of consumption expenditures pertaining to two periods into price and quantity change components; · as a measure of general inflation. The CPI’s constructed to serve purposes (ii) and (iii) above are generally based on the economic approach to index number theory. Examples of CPI’s constructed to serve purpose (iv) above are the harmonized indexes produced for the member states of the European Union and the new harmonized index of consumer prices for the euro area, which pertains to the 11 members of the European Union that will use a common currency (called Euroland in the popular press). -
Methodological Notes for OECD CPI News Release
OECD Consumer Price Index Last update: 2 June 2021 Methodological Notes for OECD CPI News Release Consumer price indices (CPIs) measure inflation as price changes of a representative basket of goods and services typically purchased by households. In most instances, national CPIs are compiled in accordance with international statistical guidelines and recommendations. However, national practices may differ in the coverage and treatment of certain items and in the use of index number formulas. In particular, country methodologies for the treatment of owner-occupied housing vary significantly and, where included, carry large weights in the index. The European Harmonised Indices of Consumer Prices (HICP) is based on a harmonised approach and a single set of definitions in order to arrive at comparable measures of inflation in the European Union (EU); owner-occupied housing is excluded from the scope of the HICP as do national CPIs for Belgium, Estonia, France, Greece, Italy, Luxembourg, Poland, Portugal, Spain and the United Kingdom. HICPs are therefore shown for comparison under the all items column in the first table. For the United Kingdom the national CPI is the same as the HICP. The three CPI aggregates for zones (OECD Total, G7 and G-20), calculated by the OECD, are annual chain-linked Laspeyres-type indices. The weights for each country in each link are based on the previous year’s relative share of individual final consumption expenditure of households and non-profit institutions serving households expressed in Purchasing Power Parities (PPPs). The CPI aggregates for OECD total and G7 area are calculated for four variables that are available for all OECD countries: CPI-All items; CPI-Food excluding restaurant meals (COICOP 01); CPI-Energy [Electricity, gas and other fuel (COICOP 04.5) plus Fuel and lubricants for personal transport equipment (COICOP 07.2.2)]; CPI-All items less Food less Energy (food and energy as defined above). -
THE ESSENTIAL MACROECONOMIC AGGREGATES Chapter 1
Chapter 1 THE ESSENTIAL MACROECONOMIC AGGREGATES 1. Gross Domestic Product (GDP) 2. “Real” GDP and GDP deflator 3. Investment and consumption 4. A first macroeconomic reconciliation 5. The second macroeconomic reconciliation 1 THE ESSENTIAL MACROECONOMIC AGGREGATES CHAPTER 1 The Essential Macroeconomic Aggregates In this first chapter, our aim is to give an initial definition of the essential macroeconomic variables, listed in the table below, and taken from the I. Each chapter of this OECD Economic Outlook for December 2004.1 We have chosen to book uses an example from illustrate this chapter using the example of Germany, but we might as well a different country. have chosen any other OECD country, since the structure of the country chapters in the OECD Economic Outlook is the same for all countries. X I. Table 1. Main macroeconomic variables Germany,a 1995 euros, annual changes in percentage 2002 2003 2004 2005 2006 Private consumption –0.7 0.0 –0.7 0.8 1.9 Gross capital formation –6.3 –2.2 –2.0 0.6 3.4 GDP 0.1 –0.1 1.2 1.4 2.3 Imports –1.6 3.9 6.4 4.9 7.5 Exports 4.1 1.8 8.1 5.7 8.1 Household saving ratio1 10.5 10.7 11.1 11.1 10.8 GDP deflator 1.5 1.1 0.9 0.8 0.9 General government financial balance2 –3.7 –3.8 3.9 –3.5 –2.7 1. Net saving as % of net disposable income. 2. % of GDP. a) The report dates from December 2004. -
Burgernomics: a Big Mac Guide to Purchasing Power Parity
Burgernomics: A Big Mac™ Guide to Purchasing Power Parity Michael R. Pakko and Patricia S. Pollard ne of the foundations of international The attractive feature of the Big Mac as an indi- economics is the theory of purchasing cator of PPP is its uniform composition. With few power parity (PPP), which states that price exceptions, the component ingredients of the Big O Mac are the same everywhere around the globe. levels in any two countries should be identical after converting prices into a common currency. As a (See the boxed insert, “Two All Chicken Patties?”) theoretical proposition, PPP has long served as the For that reason, the Big Mac serves as a convenient basis for theories of international price determina- market basket of goods through which the purchas- tion and the conditions under which international ing power of different currencies can be compared. markets adjust to attain long-term equilibrium. As As with broader measures, however, the Big Mac an empirical matter, however, PPP has been a more standard often fails to meet the demanding tests of elusive concept. PPP. In this article, we review the fundamental theory Applications and empirical tests of PPP often of PPP and describe some of the reasons why it refer to a broad “market basket” of goods that is might not be expected to hold as a practical matter. intended to be representative of consumer spending Throughout, we use the Big Mac data as an illustra- patterns. For example, a data set known as the Penn tive example. In the process, we also demonstrate World Tables (PWT) constructs measures of PPP for the value of the Big Mac sandwich as a palatable countries around the world using benchmark sur- measure of PPP. -
IIF Database Glossary
The Institute of International Finance Glossary for IIF Economic Databases Definitions for Downloadable Codes January 2019 3 Table of Contents I. NATIONAL ACCOUNTS AND EMPLOYMENT .................................................... 3 A. GDP AT CONSTANT PRICES .......................................................................................... 3 1. Expenditure Basis .................................................................................................... 3 2. Output Basis ............................................................................................................. 4 3. Hydrocarbon Sector ................................................................................................. 5 B. GDP AT CURRENT PRICES ............................................................................................ 6 C. GDP DEFLATORS.......................................................................................................... 8 D. INVESTMENT AND SAVING ............................................................................................ 9 E. EMPLOYMENT AND EARNINGS ...................................................................................... 9 II. TRADE AND CURRENT ACCOUNT ..................................................................... 11 A. CURRENT ACCOUNT ................................................................................................... 11 B. TERMS OF TRADE ....................................................................................................... 14 III. -
Suggested Answers I. Measurement of Price Changes. in Merryland, There
Department of Economics Prof. Kenneth Train University of California, Berkeley Fall Semester 2011 ECONOMICS 1 Problem Set 4 -- Suggested Answers I. Measurement of Price Changes. In Merryland, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices and quantities produced of these goods in 1980, 1990, and 1991: 1980 1990 1991 P Q P Q P Q Popcorn 1.00 500 1.00 600 1.05 590 Movie Shows 5.00 300 10.00 200 10.50 210 Diet Drinks 0.70 300 0.80 400 0.75 420 Note: The quantities (Q) in the table above are not used in answering the questions below. These would be used, however, to calculate both GDP and the GDP deflator. (The GDP deflator is the price index associated with GDP, where the bundle of goods under consideration is the aggregate output of the economy. It is used to convert between nominal and real GDP.) a) A "market bundle" for a typical family is deemed to be 5 popcorn, 3 movie shows, and 3 diet drinks. Compute the consumer price index (CPI) for each of the three years, using 1980 as the base year. The consumer price index for 1980 is 100. This is easily seen: cost of buying the market bundle in 1980 CPI = ×100 80 cost of buying the market bundle in 1980 ()()()5 ×1.00 + 3× 5.00 + 3× 0.70 = ×100 ()()()5 ×1.00 + 3× 5.00 + 3× 0.70 =100 The consumer price index for 1990 and 1991, respectively, is: 1 cost of buying the market bundle in 1990 CPI = ×100 90 cost of buying the market bundle in 1980 ()()()5 ×1.00 + 3×10.00 + 3× 0.80 = ×100 ()()()5 ×1.00 + 3× 5.00 + 3× 0.70 =169.2 cost of buying the market bundle in 1991 CPI = ×100 91 cost of buying the market bundle in 1980 ()()()5 ×1.05 + 3×10.50 + 3× 0.75 = ×100 ()()()5 ×1.00 + 3× 5.00 + 3× 0.70 =176.5 b) What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (a)? The rate of inflation equals the percentage change in the price index from 1990 to 1991. -
The Big Mac Index: a Shortcut to Inflation and Exchange Rate
CORE Metadata, citation and similar papers at core.ac.uk Provided by Clute Institute: Journals International Business & Economics Research Journal – July/August 2014 Volume 13, Number 4 The Big Mac Index: A Shortcut To Inflation And Exchange Rate Dynamics? Price Tracking And Predictive Properties Luis San Vicente Portes, Montclair State University, USA Vidya Atal, Montclair State University, USA ABSTRACT The Economist magazine has been publishing the Big Mac Index using it as a rule of thumb to determine the over- or under-valuation of international currencies based on the theory of Purchasing Power Parity since 1986. According to the theory, using the Big Mac as a tradable single-good basket, the Dollar-value of the hamburger should be equalized around the world due to arbitrage. The popularity and following of the Big Mac Index led the authors to the following two questions: 1) How effective is the Big Mac price as an indicator of overall inflation? and 2) how accurate are exchange rate movement predictions based on Big Mac prices? They find that Big Mac prices tend to lag overall inflation rates, which is highly important in studies that use Big Mac prices as measures of affordability or real incomes over time. As a guide to exchange rate movements, there is support for the theory of Purchasing Power Parity, but only as a qualitative indicator of movement in the nominal exchange rate in rich and economically stable countries, proving less effective in forecasting exchange rate movements in emerging markets. The statistical analysis is carried out using data from 1986 to 2012 from The Economist and from the World Bank for 54 countries. -
Consumer Price Index Theory
1 Elementary Indexes April 29, 2020 Erwin Diewert,1 Discussion Paper 20-06, Vancouver School of Economics, The University of British Columbia, Vancouver, Canada V6T 1L4. Abstract Elementary indexes are indexes that are used by national statistical agencies to construct a subindex of a national Consumer Price Index (CPI) at the first stage of aggregation. Usually, only price information is available to the National Statistical Office. The main elementary indexes that have been used over the years are the Carli, Dutot and Jevons indexes. These indexes are compared to each other using Taylor series approximations to the indexes. An axiomatic or test approach to elementary indexes is also described. Finally, Irving Fisher’s rectification procedure that converts an elementary index into an index which satisfies the time reversal test is discussed. Key Words: Superlative indexes, elementary indexes, the consumer price index, Fisher, Carli, Dutot and Jevons price indexes, the test approach to index number theory, Fisher’s time rectification procedure. Journal of Economic Literature Classification: C43, E31. 1 University of British Columbia and University of New South Wales. Email: [email protected] . This is a draft of Chapter 6 of Consumer Price Index Theory. This chapter draws heavily on Chapter 20 of the Consumer Price Index Manual; see ILO IMF OECD UNECE Eurostat World Bank (2004; 355-371). The author thanks Carsten Boldsen, Kevin Fox, Ronald Johnson, Claude Lamboray and Chihiro Shimizu for helpful comments. 2 1. Introduction In all countries, the calculation of a Consumer Price Index proceeds in two (or more) stages. In the first stage of calculation, elementary price indexes are calculated for the elementary expenditure aggregates of a CPI. -
Math Calculations to Better Utilize CPI Data
Math calculations to better utilize CPI data Report prepared by Gerald Perrins, branch chief of Consumer Prices in the Mid-Atlantic region, and Diane Nilsen, former regional clearance officer in the National Office of Field Operations, Bureau of Labor Statistics. The Consumer Price Index (CPI) is published points, because index point changes are as an index number that shows the change in affected by the level of the index in relation to the price of a defined market basket of goods its base period, while percent changes are not. and services over time from a base period which is defined as 100.0. An increase of 7 The following illustration shows a percent from that base period, for example, is hypothetical CPI one-month change between shown as 107.0. Alternately, that relationship April 2016 and May 2016 using the 1982- can also be expressed as the price of a base 84=100 reference base. period "market basket" of goods and services rising from $100 to $107. Currently, the Reference Base reference base for most CPI indexes is 1982- 1982-84=100 84=100 but some indexes have other May 2016 ........................................ 240.236 references bases. The reference base years April 2016 ....................................... 239.261 refer to the period in which the index is set to Index point change .............................. 0.975 100.0. In addition, expenditure weights are Divided by the earlier index ..... 0.975/239.261 updated every two years to keep the CPI Equals ............................................... 0.004075 current with changing consumer preferences. Multiplied by 100 ............................... 0.4075 Equals percent change ........................ 0.4 Index numbers are not dollar values, but measures of the change over time relative to Over-the-year percent change their base period value of 100.0 (for example, To arrive at a percent change over an entire 280.0 or 30.3). -
AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP)
AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn 2. Aggregate Income (AI) :The sum of all income earned by suppliers of resources in the economy. AI=GDP 3. Nominal GDP: the value of current production at the current prices 4. Real GDP: the value of current production, but using prices from a fixed point in time 5. Base year: the year that serves as a reference point for constructing a price index and comparing real values over time. 6. Price index: a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year. 7. Market Basket: a collection of goods and services used to represent what is consumed in the economy 8. GDP price deflator: the price index that measures the average price level of the goods and services that make up GDP. 9. Real rate of interest: the percentage increase in purchasing power that a borrower pays a lender. 10. Expected (anticipated) inflation: the inflation expected in a future time period. This expected inflation is added to the real interest rate to compensate for lost purchasing power. 11. Nominal rate of interest: the percentage increase in money that the borrower pays the lender and is equal to the real rate plus the expected inflation. 12. Business cycle: the periodic rise and fall (in four phases) of economic activity 13. Expansion: a period where real GDP is growing. 14. Peak: the top of a business cycle where an expansion has ended. -
Price Indices and Real Versus Nominal Values
Price Indices and Real versus Nominal Values Real verse Nominal Values Prices in an economy do not stay the same. Over time the price level changes (i.e., there is inflation or deflation). A change in the price level changes the value of economic measures denominated in dollars. Values that increase or decrease with price level are called nominal values. Real values are adjusted for price changes. That is, they are calculated as though prices did not change from the base year. For example, gross domestic product (GDP) is used to measure fluctuations in output. However, since GDP is the dollar value of goods and services produced in the economy, it increases when prices increase. This means that nominal GDP increases with inflation and decreases with deflation. But when GDP is used as a measure of short-run economic growth, we are interested in measuring performance—real GDP takes out the effects of price changes and allows us to isolate changes in output. Price indices are used to adjust for price changes. They are used to convert nominal values into real values. Converting Nominal GDP to Real GDP To use GDP to measure output growth, it must be converted from nominal to real. Let’s say nominal GDP in Year 1 is $1,000 and in Year 2 it is $1,100. Does this mean the economy has grown 10 percent between Year 1 and Year 2? Not necessarily. If prices have risen, part of the increase in nominal GDP for Year 2 will represent the increase in prices. GDP that has been adjusted for price changes is called real GDP. -
The Market Basket Powerpoint Lesson Plan
FEDERAL RESERVE BANK OF ST. LOUIS ECONOMIC EDUCATION The Market Basket PowerPoint Lesson Plan Lesson Author Jeannette Bennett, Federal Reserve Bank of St. Louis —Memphis Branch Standards and Benchmarks (see page 12) Lesson Description In this lesson, students will compare the price of goods from one time period to another and through discussion and role play interpret the effects of inflation on con - sumers. They will categorize goods and services according to the eight major groups of the consumer price index (CPI) and be able to determine the difference between the CPI and the core CPI. Grade Level 9-12 Time Required 60-90 minutes Concepts Bureau of Labor Statistics (BLS) Consumer price index (CPI) Core CPI Goods Inflation Inflation rate Purchasing power Services ©2013, Federal Reserve Bank of St. Louis. Permission is granted to reprint or photocopy this lesson in its entirety for educational purposes, provided the user credits the Federal Reserve Bank of St. Louis, www.stlouisfed.org/education_resources. 1 PowerPoint Lesson Plan The Market Basket Objectives Students will • define inflation, inflation rate, consumer price index (CPI), and core CPI; • explain how inflation affects purchasing power; • determine the price of goods and services from one year to another as adjusted for inflation by using an online calculator; • identify the categories of consumer spending included in the CPI and the core CPI; and • explain a role of the Bureau of Labor Statistics. Materials • PowerPoint presentation “The Market Basket” • Handout 1, one copy cut apart, making eight strips • Handout 2, one copy for each student • Handout 3, one copy for each student • One first-class postage stamp to use as a visual • Internet access Procedure 1.