General Price Level
<ul><li>GDP Deflator </li></ul><ul><li>Consumer Price Index (CPI) </li></ul><ul><li>Wholesale Price Index (WPI) </li></ul>
Deflator <ul><li>Signal’s overall national price changes </li></ul><ul><ul><li>(nominal GDP / real GDP ) *100 </li></ul></...
Consumer Price Index <ul><li>Signals change in prices facing the consumer </li></ul><ul><li>Uses retail prices </li></ul><...
Construction of CPI Item Base Year  Qty  2000-01 Base Yr Prices  P*Q Weights Current yr prices (2008-09 Price relative Ric...
WPI <ul><li>Signals changes in prices facing the producer </li></ul><ul><li>Uses wholesale prices </li></ul><ul><li>Larger...
Inflation <ul><li>Continuous rise in General price level </li></ul><ul><ul><li>WPI used in India to track inflation </li><...
Causes  of Inflation <ul><li>Demand Pull </li></ul><ul><ul><li>Increase in components of AD </li></ul></ul><ul><ul><ul><li...
<ul><li>Cost Push </li></ul><ul><ul><li>Increase in cost of production independent of demand </li></ul></ul><ul><ul><ul><l...
Inflation and Expectations <ul><li>Can be driven by expectations </li></ul>
Costs of Inflation <ul><li>Anticipated inflation vs unanticipated inflation </li></ul><ul><li>Distribution costs </li></ul...
<ul><li>Leather Shoe effect </li></ul><ul><li>Menu effect </li></ul>
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Gen price level 0810

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Gen price level 0810

  1. 1. General Price Level
  2. 2. <ul><li>GDP Deflator </li></ul><ul><li>Consumer Price Index (CPI) </li></ul><ul><li>Wholesale Price Index (WPI) </li></ul>
  3. 3. Deflator <ul><li>Signal’s overall national price changes </li></ul><ul><ul><li>(nominal GDP / real GDP ) *100 </li></ul></ul><ul><li>Uses domestically produced final goods and services </li></ul><ul><li>Quantity of weights not fixed </li></ul><ul><li>One year lag in reporting </li></ul>
  4. 4. Consumer Price Index <ul><li>Signals change in prices facing the consumer </li></ul><ul><li>Uses retail prices </li></ul><ul><li>Basket of goods </li></ul><ul><ul><li>Consumption goods and services. Included imports </li></ul></ul><ul><ul><li>Fixed quantity weights </li></ul></ul><ul><li>Two month lag in reporting </li></ul>
  5. 5. Construction of CPI Item Base Year Qty 2000-01 Base Yr Prices P*Q Weights Current yr prices (2008-09 Price relative Rice 10 kg Rs. 10/kg 100 .143 Rs. 15/kg 150 Cloth 100 yards Rs.20/yard 200 .286 Rs.22/yard 110 House 2 room Rs.200/ room 400 .571 Rs.250/room 125
  6. 6. WPI <ul><li>Signals changes in prices facing the producer </li></ul><ul><li>Uses wholesale prices </li></ul><ul><li>Larger basket of goods including intermediate goods but no services </li></ul><ul><li>Fixed quantity weights </li></ul><ul><li>Two week lag while reporting </li></ul>
  7. 7. Inflation <ul><li>Continuous rise in General price level </li></ul><ul><ul><li>WPI used in India to track inflation </li></ul></ul><ul><ul><li>CPI used for measuring changes in cost of living </li></ul></ul>
  8. 8. Causes of Inflation <ul><li>Demand Pull </li></ul><ul><ul><li>Increase in components of AD </li></ul></ul><ul><ul><ul><li>Usually an increases in G </li></ul></ul></ul><ul><ul><li>Economy in excess capacity </li></ul></ul><ul><ul><ul><li>Increase in output without resorting to price rise </li></ul></ul></ul><ul><ul><li>Economy operating at full capacity </li></ul></ul><ul><ul><ul><li>Increase in prices </li></ul></ul></ul>
  9. 9. <ul><li>Cost Push </li></ul><ul><ul><li>Increase in cost of production independent of demand </li></ul></ul><ul><ul><ul><li>Rising salaries and wages </li></ul></ul></ul><ul><ul><li>Rise in prices and fall in output </li></ul></ul>
  10. 10. Inflation and Expectations <ul><li>Can be driven by expectations </li></ul>
  11. 11. Costs of Inflation <ul><li>Anticipated inflation vs unanticipated inflation </li></ul><ul><li>Distribution costs </li></ul><ul><ul><li>Penalizes people with fixed income </li></ul></ul><ul><li>Redistribution of income from lender to borrower </li></ul><ul><li>Diversion of financial savings to land, gold etc </li></ul><ul><ul><li>Affects investment </li></ul></ul><ul><li>Competitiveness gets eroded in the external sector </li></ul>
  12. 12. <ul><li>Leather Shoe effect </li></ul><ul><li>Menu effect </li></ul>

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