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Impact of Price Changes on a Broad Economic Price Index
Consider an economy where the following three events occur simultaneously in a single year:
- The price of domestically produced steel, which is sold to local construction firms, increases by 15%.
- The price of imported coffee, which is widely consumed by households, increases by 20%.
- The price of domestically manufactured cars, a major export to other countries, increases by 10%.
Based on the definition of a price index that measures the average price level of all new, domestically produced final goods and services, explain which of these events would be included in its calculation and why.
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Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
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Analysis in Bloom's Taxonomy
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An economic price index is calculated to measure the average price level of all new, final goods and services produced within a country's borders during a specific period. This includes items like new machinery bought by businesses and goods sold to other countries, but it excludes any items that are imported. Given this definition, which of the following events would directly cause an increase in this specific price index?
Impact of Price Changes on a Broad Economic Price Index
Analyzing Price Changes and a Broad Economic Price Index
An economy produces only two goods: apples and bananas. It imports oranges for consumption. In a given year, the price of oranges doubles, while the prices of domestically produced apples and bananas remain unchanged. This price change will cause the economy's price index, which measures the average price level of all final goods and services produced within the country's borders, to increase.