price index

Examples of price index in the following topics:

• Price Indices and the Rate of Change of Prices

  • A price index is a statistic designed to help compare how a normalized average of prices differ between time periods.
  • In order to calculate a price index, one must specify a base period and a basket of goods.
  • The Laspeyres index and the Paasche index are two price indexes that attempt to compensate for this difficulty.
  • The Laspeyres price index is (166/142)*100=116.9, giving an inflation rate of 16.9%.
  • Two common price indices are the Consumer Price Index (CPI) and the Producer Price Index (PPI).

• Measuring Inflation

  • The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index (CPI) The consumer price index measures movements in prices of a fixed basket of goods and services purchased by a "typical consumer".
  • CPI is usually expressed as an index, which means that one year is the base year.
  • The index for another year (say, year 1) is calculated by $CPI_{year 1}=({Basket Cost}_{year 1}/{Basket Cost}_{base year}) * 100$
  • The price index is (212/207)*100, or 102.4.
  • The U.S. inflation rate is measured by comparing the price of goods in one year to the price of goods in a previous base year.

• Defining and Calculating CPI

  • The consumer price index (CPI) is a statistical estimate of the change in prices of goods and services bought for consumption.
  • The consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption by households.
  • The CPI can be used to index the real value of wages, salaries, pensions, and price regulation.
  • The graph shows the consumer price index in the United States from 1913 - 2004.
  • The x-axis indicates year, the left y-axis indicates the Consumer Price Index, and the right y-axis indicates annual percentage change in Consumer Price Index, which can be used to measure inflation.

• The GDP Deflator

  • The GDP deflator is a price index that measures inflation or deflation in an economy by calculating a ratio of nominal GDP to real GDP.
  • The GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.
  • It is a price index that measures price inflation or deflation, and is calculated using nominal GDP and real GDP.
  • Like the Consumer Price Index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year.
  • The GDP deflator measures price inflation in an economy.

• Using Monetary Policy to Target Inflation

  • Increases in inflation, measured by changes in the consumer price index (CPI), are not necessarily coupled to any factor internal to country's economy.
  • Supporters of a nominal income target also criticize the tendency of inflation targeting to ignore output shocks by focusing solely on the price level.

• Years of Change: The 1960s and 1970s

  • The 1973-1974 oil embargo by members of the Organization of Petroleum Exporting Countries (OPEC) pushed energy prices rapidly higher and created shortages.
  • Even after the embargo ended, energy prices stayed high, adding to inflation and eventually causing rising rates of unemployment.
  • People began to expect continuous increases in the price of goods, so they bought more.
  • This increased demand pushed up prices, leading to demands for higher wages, which pushed prices higher still in a continuing upward spiral.
  • Labor contracts increasingly came to include automatic cost-of-living clauses, and the government began to peg some payments, such as those for Social Security, to the Consumer Price Index, the best-known gauge of inflation.

• Glossary

  • Bull market: A market in which there is a continuous rise in stock prices.
  • Consumer price index: A measure of the U.S. cost of living as tabulated by the U.S.
  • Dow Jones Industrial Average: A stock price index, based on 30 prominent stocks, that is a commonly used indicator of general trends in the prices of stocks and bonds in the United States.
  • (This should not be confused with increases in the prices of specific goods relative to the prices of other goods. )
  • Price fixing: Actions, generally by a several large corporations that dominate in a single market, to escape market discipline by setting prices for goods or services at an agreed-on level.

• Market Power

  • Such firms are often referred to as "price makers. " In contrast, firms with limited to no market power are referred to as "price takers. "
  • A monopoly, a price maker with market power, can raise prices and retain customers because the monopoly has no competitors.
  • A perfectly competitive firm, a price taker with no market power, cannot raise its price without losing its customers.
  • Measurement of market power is often accomplished with concentration ratios or the Herfindahl-Hirschman Index (HHI).
  • The Herfindahl-Hirschman Index (HHI) is a measure of the size of firms in relation to the industry, and an indicator of the amount of competition among them.

• Calculating Real GDP

  • For example, a nominal value can change due to shifts in quantity and price.
  • It is calculated using the prices of a selected base year.
  • Real values measure the purchasing power net of any price changes over time.
  • The real GDP determines the purchasing power net of price changes for a given year.
  • It transforms the money-value measure, nominal GDP, into an index for quantity of total output.

• Analysis of Price Discrimination

  • Price discrimination is present in commerce when sellers adjust the price on the same product in order to make the most revenue possible.
  • Second degree price discrimination: the price of a good or service varies according to the quantity demanded.
  • By using price discrimination, the seller makes more revenue, even off of the price sensitive consumers.
  • Premium pricing: uses price discrimination to price products higher than the marginal cost of production.
  • Gender based prices: uses price discrimination based on gender.