Real versus nominal value

Chapter 14: Inflation: An Overview ? -The economic costs of inflation -How inflation creates winners and losers -Why policy makers try to maintain a stable rate of inflation -The difference between real and nominal values of income, wages, and interest rates -The problems of deflation and disinflation ? Inflation: Most common complaint: an increase in the price level makes everyone poorer- does not make everyone poorer Real Wage: the wage rate divided by the price level Real income: income divided by the price level Inflation Rate: the percent change per year in a price index?typically the consumer price index the percent increase in the overall level of prices per year ? ? The level of prices doesn?t matter Reducing prices = Reducing income

Chapter 15: The Measurement and Calculation of Inflation ? -How the inflation rate is measured -What a price index is and how it is calculated -The importance of the consumer price index and other price indexes ? Aggregate Price Level: a measure of the overall level of prices in the economy/single number to represent the overall level of prices Market Basket: a hypothetical set of consumer purchases of goods and services/Hypothetical Consumption bundle Consumption bundle: the typical basket of goods and services purchased before the price changes Price index: measure of the cost of purchasing a given market basket in a given year Base year: always results in a price index of 100 Price indexes are also the basis for measuring inflation

Chapter 11: Interpreting Real Gross Domestic Product ? -The difference between real GDP and nominal GDP -Why real GDP is the appropriate measure of real economic activity ? GDP: a measure of the size of the economy represents increase in prizes of goods and services rather than an increase in output provides a good way to compare the size of different economies but not a good measure of the economy?s growth over time can grow to economic expansion or just inflation Real GDP: measures actual changes in aggregate output/ adjusted for price changes total value of all final goods and services produced during a given year calculated using the prices of a selected base year (assumed prices stay constant)