140 Why It Matters: Inflation and Price Indexes

Why evaluate macro economic performance using indicators that include output measures, unemployment, and inflation?

When you go to a doctor’s appointment, they check your weight, your heartbeat, and your blood pressure. They ask how you are feeling. They may also do other medical tests. What blood pressure is measuring, or what the laboratories look for in a urinalysis or blood test may not be intrinsically interesting (e.g. how is blood sugar measured?), but the results of the tests are anything but unimportant. Those results indicate how healthy or sick you are. They are necessary diagnostics for you and your doctor to determine what you need to do to improve your health, whether you are currently sick or you just want to improve the quality or length of your life.

That is a good metaphor for thinking about the present module. Up until this point, we’ve been studying introductory economics. This module is the first on macroeconomics per se. The module introduces the most important economic indicators for determining the state of a nation’s macro economy. Are you planning to start a career or make a career change in the future? Are you interesting in purchasing a home, or selling one that you already own. How about buying a new car? What about saving for retirement? If so, what’s the best place to put your savings? These are all questions that require some knowledge of how the economy is doing, now and in the future. This module will help you come up with better answers to those questions.

As you go through this module, here are a few questions to keep in mind:

•    When have recessions occurred in your lifetime?
•    When was the last time inflation was a significant problem for the U.S.?
•    What is the average rate of unemployment during good times?
•    Overall, how is the economy doing right now?

There is no doubt that this material contains some technical aspects. The idea is to give you enough technical detail to understand where the most important economic indicators come from and how they should be interpreted. Ultimately, you need to learn enough to be able to draw your own conclusions about the state of the economy from the statistics you hear about in the news.

This is completely doable, so let’s get started.

LEARNING OUTCOMES

• Explain the concept of a price index and explain how price indices are derived.
• Define the rate of inflation; Explain how the rate of inflation is calculated
• Identify the consequences of price instability (i.e. inflation)
• Use a price index to translate between real and nominal data
• Define the GDP price index (also known as the GDP deflator or the Implicit Price Deflator)
• Differentiate between nominal GDP and real GDP