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Arvin John Valiente E.
Maruya
BSED – SS4
For Today
Consumer Price Index
Inflation
Review of definition
Review of real and nominal variables
A look at the Hist...
Objectives:
Define consumer price index (CPI) and inflation;
Discuss the relationship between CPI and
inflation;
Review...
Prelection
Index Numbers
Value of measure in a current period
_________________________________ X 100
Value of measure in base period
Index of Love
2009 – I AM SO INLOVE (99%)
2010 - SWERTE KO SA AKONG UYAB (95%)
2011 – AY DI MI KAUBAN. SIGE LANG (85%)
201...
THE CONSUMER PRICE INDEX
An index of cost, through
time, of a fixed market
basket of goods purchased by
a typical househo...
THE CONSUMER PRICE INDEX
The consumer price index (CPI) is a
measure of the overall cost of the goods and
services bought...
THE CONSUMER PRICE INDEX
When the CPI rises, the
typical family has to spend
more pesos to maintain the
same standard of ...
16%
Food and
beverages
17%
Transportation
Medical care
6%
Recreation
6%
Apparel
4%
Other goods
and services
4%
41%
Housing...
How the Consumer Price Index Is
Calculated
Fix the Basket: Determine what prices are
most important to the typical consum...
How the Consumer Price Index Is
Calculated
Find the Prices: Find the
prices of each of the goods
and services in the bask...
How the Consumer Price Index Is
Calculated
Compute the Basket’s Cost:
Use the data on prices to
calculate the cost of the...
How the Consumer Price Index Is
Calculated
Choose a Base Year and Compute theChoose a Base Year and Compute the
Index:Ind...
How the Consumer Price Index Is
Calculated
Compute the inflation rate:
The inflation rate is the
percentage change in the...
How the Consumer Price Index Is
Calculated
Purchasing Power
of the Peso (PPP) =
reciprocal of CPI *
100 Taken from N. Gr...
Activity # 1 – Measuring CPI
Problems in Measuring the Cost of
Living
The CPI is an accurate
measure of the selected
goods that make up the
typical bu...
Problems in Measuring the Cost of
Living
Substitution bias
Introduction of new goods
Unmeasured quality
changes
Problems in Measuring the Cost of
Living
Substitution Bias
The basket does not change to reflect
consumer reaction to ch...
Problems in Measuring the Cost of
Living
Introduction of New Goods
The basket does not reflect the change in
purchasing ...
Problems in Measuring the Cost of
Living
Unmeasured Quality Changes
If the quality of a good rises from one year to
the ...
Problems in Measuring the Cost of
Living
The substitution bias, introduction of new goods,
and unmeasured quality changes...
How is the CPI used?
1. As a Policy Target
2.To Index Payments
3. To Translate from Nominal
to Real Variables
Nominal to Real Values
LOVE
Problem Sets
Nominal to Real Variables
Problem Set # 1:
Vilma receives a salary of 2,500Php
monthly. It is her habit that she visits Ti...
Nominal to Real Variables
Problem Set # 1:
Vilma receives a salary of 2,500Php
monthly. It is her habit that she visits Ti...
Nominal to Real Variables
Problem Set # 2:
Vilma receives a salary of 2,500Php
monthly. It is her habit that she visits Ti...
Nominal to Real Variables
Problem Set # 3:
Joy received 500Php from his ninang
Grace on his 18th
birthday. He bought 100Ph...
The Importance of Real Values
Real values = ( nominal value/ price index ) X 100
PART 2 - Inflation
Inflation and the Measurement of
Real GDP
“The GDP price index measures
the prices of all goods and services
that are inc...
THE CLASSICAL THEORY OF INFLATION
Inflation is an increase in the overall
level of prices.
Hyperinflation is an extraord...
THE CLASSICAL THEORY OF INFLATION
Inflation: Historical Aspects
Over the past 60 years, prices have risen on
average abo...
THE CLASSICAL THEORY OF INFLATION
Inflation: Historical Aspects
In the 1970s prices rose by 7
percent per year.
During ...
THE CLASSICAL THEORY OF INFLATION
The quantity theory of money is used to
explain the long-run determinants of the
price ...
Copyright © 2004 South-Western
Quantity of
Money
Value of
Money,1/P
Price
Level, P
Quantity fixed
by the Fed
Money supply
...
Copyright © 2004 South-Western
Quantity of
Money
Value of
Money,1/P
Price
Level, P
Money
demand
0
1
(Low)
(High)
(High)
(L...
“Inflation benefits no one!”
The Costs of Inflation
Inflation can redistribute
purchasing power from one group
to another, but it cannot-by itself-
de...
The Costs of Inflation
When people must
spend time and other
resources coping with
inflation, they pay an
opportunity cos...
Philippines Top Grossing Movies as of
March 2014
http://www.starmometer.com/2014/03/01/top-20-highest-grossing-filipino-mo...
Rank Film Studio(s) Year Domestic gross
1 Girl, Boy, Bakla, Tomboy Star Cinema, Viva Films 2013 ₱ 429,147,428
2 My Little ...
Indexation
The automatic
correction by law or
contract of an amount for
the effects of inflation.
Indexation
Starting June 1, 2014, the new minimum wage in Region XI will be
P312.00 per day for workers in non-agricultur...
Real and Nominal Interest Rates
Suppose Gina deposits 45,000Php in a
bank account that pays an annual
interest rate of 10...
Real and Nominal Interest Rates
INFLATION
ZERO INFLATION
DEFLATION
Conclusion
“Ang piso’y ‘di na
katumbas ng isang
daan.”
Additional References
Principles of Macroeconomics by N. Gregory Mankiw
Powerpoint Slides for Principles of Economics by...
Measuring the Cost of Living - computing for CPI and Inflation (SS 113)
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Measuring the Cost of Living - computing for CPI and Inflation (SS 113)

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SS 113 (Economic Planning and Strategy) report on measuring the cost of livingg.

Additional References:

N. Gregory Mankiw's Principles of Macroeconomics.
N. Gregory Mankiw's PPT slides for Principles of Macroeconomics.

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Measuring the Cost of Living - computing for CPI and Inflation (SS 113)

  1. 1. Arvin John Valiente E. Maruya BSED – SS4
  2. 2. For Today Consumer Price Index Inflation Review of definition Review of real and nominal variables A look at the History of Inflation The Costs of Inflation The Inflation Myth
  3. 3. Objectives: Define consumer price index (CPI) and inflation; Discuss the relationship between CPI and inflation; Review the difference between real and nominal values; Identify the limitations of CPI; Discuss national issues pertaining to inflation and CPI.
  4. 4. Prelection
  5. 5. Index Numbers Value of measure in a current period _________________________________ X 100 Value of measure in base period
  6. 6. Index of Love 2009 – I AM SO INLOVE (99%) 2010 - SWERTE KO SA AKONG UYAB (95%) 2011 – AY DI MI KAUBAN. SIGE LANG (85%) 2012 – MY LOVE IS LIKE A TREE. TAAS! (98%) 2013 – KFINE. DI MUREPLY, DI PUD MAGPAKITA. (60%) January 2014 – Katotohanan, Kalayaan, Katarungan! (43%) Question: What is my index of love?
  7. 7. THE CONSUMER PRICE INDEX An index of cost, through time, of a fixed market basket of goods purchased by a typical household in some base period.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  8. 8. THE CONSUMER PRICE INDEX The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer. The National Statistics Office reports the CPI each month. It is used to monitor changes in the cost of living over time.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  9. 9. THE CONSUMER PRICE INDEX When the CPI rises, the typical family has to spend more pesos to maintain the same standard of living.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  10. 10. 16% Food and beverages 17% Transportation Medical care 6% Recreation 6% Apparel 4% Other goods and services 4% 41% Housing 6% Education and communication Copyright©2004 South-Western
  11. 11. How the Consumer Price Index Is Calculated Fix the Basket: Determine what prices are most important to the typical consumer. The National Statistics Office (NSO) identifies a market basket of goods and services the typical consumer buys. The NSO conducts monthly consumer surveys to set the weights for the prices of those goods and services.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  12. 12. How the Consumer Price Index Is Calculated Find the Prices: Find the prices of each of the goods and services in the basket for each point in time.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  13. 13. How the Consumer Price Index Is Calculated Compute the Basket’s Cost: Use the data on prices to calculate the cost of the basket of goods and services at different times.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  14. 14. How the Consumer Price Index Is Calculated Choose a Base Year and Compute theChoose a Base Year and Compute the Index:Index: Designate one year as the base year, making it the benchmark against which other years are compared. Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  15. 15. How the Consumer Price Index Is Calculated Compute the inflation rate: The inflation rate is the percentage change in the price index from the preceding period.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  16. 16. How the Consumer Price Index Is Calculated Purchasing Power of the Peso (PPP) = reciprocal of CPI * 100 Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  17. 17. Activity # 1 – Measuring CPI
  18. 18. Problems in Measuring the Cost of Living The CPI is an accurate measure of the selected goods that make up the typical bundle, but it is not a perfect measure of the cost of living.
  19. 19. Problems in Measuring the Cost of Living Substitution bias Introduction of new goods Unmeasured quality changes
  20. 20. Problems in Measuring the Cost of Living Substitution Bias The basket does not change to reflect consumer reaction to changes in relative prices. Consumers substitute toward goods that have become relatively less expensive. The index overstates the increase in cost of living by not considering consumer substitution.
  21. 21. Problems in Measuring the Cost of Living Introduction of New Goods The basket does not reflect the change in purchasing power brought on by the introduction of new products. New products result in greater variety, which in turn makes each dollar more valuable. Consumers need fewer dollars to maintain any given standard of living.
  22. 22. Problems in Measuring the Cost of Living Unmeasured Quality Changes If the quality of a good rises from one year to the next, the value of a dollar rises, even if the price of the good stays the same. If the quality of a good falls from one year to the next, the value of a dollar falls, even if the price of the good stays the same. The BLS tries to adjust the price for constant quality, but such differences are hard to measure.
  23. 23. Problems in Measuring the Cost of Living The substitution bias, introduction of new goods, and unmeasured quality changes cause the CPI to overstate the true cost of living. The issue is important because many government programs use the CPI to adjust for changes in the overall level of prices. The CPI overstates inflation by about 1 percentage point per year.  Taken from N. Gregory Mankiw’s PPT slides for Principles of Macroeconomics.
  24. 24. How is the CPI used? 1. As a Policy Target 2.To Index Payments 3. To Translate from Nominal to Real Variables
  25. 25. Nominal to Real Values LOVE
  26. 26. Problem Sets
  27. 27. Nominal to Real Variables Problem Set # 1: Vilma receives a salary of 2,500Php monthly. It is her habit that she visits Tidoy to buy Tocino and Soriso at 500Php. The following month, Vilma was promoted and she received double her last salary. When she came to visit Tidoy, she found out that the price of Tocino and Soriso wento up from 500Php to 1000Php. Find the real wage.
  28. 28. Nominal to Real Variables Problem Set # 1: Vilma receives a salary of 2,500Php monthly. It is her habit that she visits Tidoy to buy Tocino and Soriso at 500Php. The following year, Vilma was promoted and she received double her last salary. When she came to visit Tidoy, she found out that the price of Tocino and Soriso wento up from 500Php to 1000Php. Find the real wage.
  29. 29. Nominal to Real Variables Problem Set # 2: Vilma receives a salary of 2,500Php monthly. It is her habit that she visits Tidoy to buy Tocino and Soriso at 500Php. The following year, when she came to visit Tidoy, she found out that the price of Tocino and Soriso wento up from 500Php to 1000Php. Find the real wage.
  30. 30. Nominal to Real Variables Problem Set # 3: Joy received 500Php from his ninang Grace on his 18th birthday. He bought 100Php worth of Bulad to satisfy his cravings. On his 19th birthday, Joy received 1000Php. President Noynoy has signed a bill imposing that Bulad will be priced 100Php forever. Find the real wage.
  31. 31. The Importance of Real Values Real values = ( nominal value/ price index ) X 100
  32. 32. PART 2 - Inflation
  33. 33. Inflation and the Measurement of Real GDP “The GDP price index measures the prices of all goods and services that are included in the GDP, while the CPI measures the prices of all goods and services bought by households.”
  34. 34. THE CLASSICAL THEORY OF INFLATION Inflation is an increase in the overall level of prices. Hyperinflation is an extraordinarily high rate of inflation.
  35. 35. THE CLASSICAL THEORY OF INFLATION Inflation: Historical Aspects Over the past 60 years, prices have risen on average about 5 percent per year. Deflation, meaning decreasing average prices, occurred in the U.S. in the nineteenth century. Hyperinflation refers to high rates of inflation such as Germany experienced in the 1920s.
  36. 36. THE CLASSICAL THEORY OF INFLATION Inflation: Historical Aspects In the 1970s prices rose by 7 percent per year. During the 1990s, prices rose at an average rate of 2 percent per year.
  37. 37. THE CLASSICAL THEORY OF INFLATION The quantity theory of money is used to explain the long-run determinants of the price level and the inflation rate. Inflation is an economy-wide phenomenon that concerns the value of the economy’s medium of exchange. When the overall price level rises, the value of money falls.
  38. 38. Copyright © 2004 South-Western Quantity of Money Value of Money,1/P Price Level, P Quantity fixed by the Fed Money supply 0 1 (Low) (High) (High) (Low) 1 /2 1 /4 3 /4 1 1.33 2 4 Equilibrium value of money Equilibrium price level Money demand A
  39. 39. Copyright © 2004 South-Western Quantity of Money Value of Money,1/P Price Level, P Money demand 0 1 (Low) (High) (High) (Low) 1 /2 1 /4 3 /4 1 1.33 2 4 M1 MS1 M2 MS2 2. . . . decreases the value of money . . . 3. . . . and increases the price level. 1. An increase in the money supply . . . A B
  40. 40. “Inflation benefits no one!”
  41. 41. The Costs of Inflation Inflation can redistribute purchasing power from one group to another, but it cannot-by itself- decrease the average real income in the economy. Oil vs. US
  42. 42. The Costs of Inflation When people must spend time and other resources coping with inflation, they pay an opportunity cost.
  43. 43. Philippines Top Grossing Movies as of March 2014 http://www.starmometer.com/2014/03/01/top-20-highest-grossing-filipino-movies-of-all-time-as-of-march- 2014/
  44. 44. Rank Film Studio(s) Year Domestic gross 1 Girl, Boy, Bakla, Tomboy Star Cinema, Viva Films 2013 ₱ 429,147,428 2 My Little Bossings Octo Arts Films 2013 ₱ 393,000,000 (est.) 3 Sisterakas Star Cinema, Viva Films 2012 ₱ 391,400,000 (est.) 4 It Takes a Man and a Woman Star Cinema, Viva Films 2013 ₱ 375,024,507 5 The Unkabogable Praybeyt Benjamin Star Cinema, Viva Films 2011 ₱ 331,631,283 6 Bride for Rent Star Cinema 2014 ₱ 326,958,423 7 Starting Over Again Star Cinema 2014 ₱ 307,239,951 8 No Other Woman Star Cinema, Viva Films 2011 ₱ 278,418,883 9 The Mistress Star Cinema 2012 ₱ 262,790,230 10 This Guy’s in Love with U Mare! Star Cinema, Viva Films 2012 ₱ 250,540,701
  45. 45. Indexation The automatic correction by law or contract of an amount for the effects of inflation.
  46. 46. Indexation Starting June 1, 2014, the new minimum wage in Region XI will be P312.00 per day for workers in non-agriculture and in retail/service enterprises employing more than 10 workers. In agriculture, the new minimum wage will be P302.00 per day and in retail/service establishments employing not more than 10 workers, P281.00 per day. Wage Order No. RB XI- 18, issued May 7, 2014 provides for an P11.00 per day basic pay increase and a P15.00 COLA integration. Further, minimum wage earners will receive an additional P5.00 COLA per day effective December 1, 2014. The Wage Order does not allow exemption from the payment of minimum wages (http://www.nwpc.dole.gov.ph/news.html).
  47. 47. Real and Nominal Interest Rates Suppose Gina deposits 45,000Php in a bank account that pays an annual interest rate of 10 percent. A year later, after Gina has accumulated 100Php in interest, she withdraws her 45,100Php. Is Gina 100Php richer than she was when she made the deposit a year earlier?
  48. 48. Real and Nominal Interest Rates INFLATION ZERO INFLATION DEFLATION
  49. 49. Conclusion “Ang piso’y ‘di na katumbas ng isang daan.”
  50. 50. Additional References Principles of Macroeconomics by N. Gregory Mankiw Powerpoint Slides for Principles of Economics by N. Gregory Mankiw.

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