Inflation Indexing and its Macroeconomic Effects

1206 WordsFeb 1, 20185 Pages
Inflation Indexing and its Macroeconomic Effects Inflation is often used to refer to an increase in overall price levels in an economy. Inflation is represented in changes in the cost of living for households as well as production costs for businesses. Thus, it is important to measure inflation accurately. There are a number of different methods for measuring inflation, and as such, it is crucial that the measurements are factual and not manipulated by governmental agencies for political gain. Price measures As stated above, there are a multitude of tools for measuring inflation, one of which is the Producer Price Index (PPI). The PPI surveys a sample of manufacturers in order to measure the cost of a set of goods and services bought by the firms (Mankiw, 2012). A rise in the producer price index can be a precursor to rises in other indexes since manufacturers will pass on rising costs to consumers. An accurate PPI is therefore particularly important because the PPI can help companies make informed decisions about future contracts and necessary price changes (Cheolbeom, & Deockhyun, 2011). Another option, known as the GDP deflator, uses the prices of everything produced in an economy (weighted by how much of each of those things is produced), and the changes in value of those items and services over a base period. In other words, the GDP deflator is used to measure the difference in real GDP and Nominal GDP. It is an important indicator of economic conditions as it

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