ianroo

Some price levels:
1) GDP deflator
2) CPI

Growth Rate (% change):
General formula - Growth rate of X at time t = {(X_t - X_t-1) / X_t-1] * 100%
Economic growth rate = growth rate of Real GDP
Inflation rate = growth rate of GDP deflator
                     = overall price level change
                     = ΔCPI

CPI (Consumer Price Index):
Definition - a measure of overall costs of the goods & services bought by a typical consumer
Calculation - ΔCPI = (price of basket currently/ price of basket in base year) * 100
                 - 1) fixed the basket (4 clothes, 2 drinks...)
                 - 2) final the price (clothes $1, drinks $2...)
                 - 3) calculate basket's cost (in $)= Σ (1) * (2)           --- CPI_(Current)
                 - 4) choose a base year, calculate (3) in this year    --- CPI_(Base)
                 - 5) computer inflation rate = ΔCPI = [CPI_(Current) / CPI_(Base)] * 100%
Properties - goal: measure changes in the cost of living
               - gauge how much income must rise to maintain a constant standard of living
               - things weight(%) more → Δprice affects more (即使Δprice is smaller)
Problems - 1) Situation Bias : CPI ignores substitution effect of goods & services 
                                           → usually over estimate the increase of cost of living
                 2) Introduction of new goods : each dollar become more valuable
                 3) Unmeasured quality change : quality can improve
Summary - CPI is not perfect, but so far is the best one

Inflation vs Deflation:
Inflation = economy's overall price level is rising
Deflation =                .....                        declining
Inflation rate = Δ% in the price level (CPI) from previous period
Is inflation good/bad? → It depends.
                               - for consumer: bad (more expensive)
                               - for producer: good (earn more)
                               - inflation → CPI↑, GDP↑→larger GDP = better life
Is deflation good/bad? → Depends, but usually bad and serious 
                                ∵consumer keep waiting for next lowest price possible

GDP deflator vs CPI:
Similarity - Usually tells the same story, usually move together
Differences - GDP deflator reflects the Δprice of domestically produced goods & services
                 - CPI reflects the Δprice of consumer bought (consumed) goods & services
                         (沒有domestical的問題，買進口商品也算)
Examples - 1) an US produced airplane increase its price
                     → US GDP↑ ∵produced in US
                     → CPI no change ∵airplaine is not in typical consumer's basket
                 2) a Sweden-made car sold in US increase price
                     → US GDP no change ∵not produced in US ("imported)
                         ☆Y=C+I+G+(X-M)中的C和M同時等量增加→cancel out→Y no change
                     → CPI↑ ∵people buy cars
                 3) oil price increase
                     → US GDP↑a little bit  ∵oil produced in US is less, mostly import
                     → CPI↑a lot  ∵gasoline, gas, heating...
Which one is better? Depends on the information of interest.

How to compare living standard:
Goal - correct the effect of inflation using price levels (usuall CPI)
Formula - amount in today's dollar        today's CPI
               -----------------------     =  --------------
               amount in year T's dollar       year T's CPI
          or...
               A's salary in 2007 = CPI₍₂₀₀₇₎ * A's salary in 1900 / CPI₍₁₉₀₀₎

Interest Rates vs Inflation:
Real Interest rate = corrected by inflation
Nominal Interest rate = not corrected by inflation = what we see on TV, in commercial
                               = what we see in our salary = bank interest rate
Relation between Real & Nominal - Fisher Equation
             Real interest rate (r) = Nominal interest rate (R) - inflation rate (π)
             r = R - π
If inflation rate < bank interest rate → consumer better off (purchase power↑)
   inflation rate == bank interest rate → no change
   inflation rate > bank interest rate → consumer worse off (purchase power↓)