Macroeconomics: The Big Picture

Read this chapter and attempt the "Try It" exercises. Also, complete the concept problems and the numerical problems at the end of the chapter. In the first section of this chapter, you will read about the definition of Gross Domestic Product and some of the issues around measuring it. You will also learn about the 4 phases of the business cycle. As you will see, the economy goes through naturally alternating periods of economic growth and recession. You will review certain sections of this chapter later in the unit.

2. Price-Level Changes

KEY TAKEAWAYS

  • Inflation is an increase in the average level of prices, and deflation is a decrease in the average level of prices. The rate of inflation or deflation is the percentage rate of change in a price index.
  • The consumer price index (CPI) is the most widely used price index in the United States.
  • Nominal values can be converted to real values by dividing by a price index.
  • Inflation and deflation affect the real value of money, of future obligations measured in money, and of fixed incomes. Unanticipated inflation and deflation create uncertainty about the future.
  • Economists generally agree that the CPI and other price indexes that employ fixed market baskets of goods and services do not accurately measure price-level changes. Biases include the substitution bias, the new-product bias, the quality-change bias, and the outlet bias.