ECON1102 WEEK 2 (continued from week 1 slides) 40. Is GDP positively correlated w/ economic welfare?

Not quite for equitable distribution of income, become more inequitable despite that the GPD per capita has increased happiness: as income increases, happiness tends to rise, but at a certain point, even higher income will have diminishing returns of happiness. Not a perfect correlation 41. Alternatives (complements) to GPD instead of GPD survey people on their happiness-difficult to measure, self perceived Or measure: more sophisticated, income, but also other things which effect our welfare. Combine into one, good idea but there are many issues, broader measure of GPD with heaps of other variables, but how do you weight each one? 42. Measures of the Price Level two different ways to measure the average price level nominal / real gives you price index rearrange etc CPI a price index and sees how price of goods change over time 43. Chose a basket of goods which represents the goods comsumed by society CPI take the same basket of g/s and calculate CPI for that year, compare/divide them and the only thing that can change is the price of the goods 44. Cost of living same things as average price every 5 years ABS surveys the population to determine what they spend and use results as the weights 45. can use CPI to address this question compare the different contexts 46. 47. cpi: fixed basket of good, but basket changed every 5 years. Now we are in 4 years, one year short of change in basket, but 4 years is a long time for change in technology, then we will be overestimate the true rate of inflation Another problem is that a good did not exist in the old basket We do not take the basics of microeconomics, ie subsitiutes away from more expensive to cheaper: again creates a bias. Again overestimates the inflation Autrhories realize this and attempt to make adjustments 48. Inflation at high levels 5-10> is generally viewed as a bad thing

first two: true cost of inflation, explicit costs Menu costs: real costs associated w/ changing prices, consumers do not like this, ie: costs to reprint menus Shoe-leather cost: transaction costs Only costs econmists can point to to fully ancipated inflation, only what you can predict if perfect inflation 49. Inflation and interest rates. How inflation affects the economy, it effects the interest rates. (nomial interest rates). If you think real interest rate: percentage increase in the real purchasing power of a financial asset 50. Fisher effect: the interest rate you charge = real rate you want + the expected inflation nominal interest rate would include the real rate and the inflation?