chapter 13 inflation
Download
Skip this Video
Download Presentation
Chapter 13 Inflation

Loading in 2 Seconds...

play fullscreen
1 / 58

Chapter 13 - PowerPoint PPT Presentation


  • 515 Views
  • Uploaded on

Chapter 13 Inflation. Key Concepts Summary. ©2000 South-Western College Publishing. What is inflation?. An increase in the general (average) price level of goods and services in the economy. What is deflation?.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 13' - Olivia


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 13 inflation
Chapter 13Inflation
  • Key Concepts
  • Summary

©2000 South-Western College Publishing

what is inflation
What is inflation?

An increase in the general (average) price level of goods and services in the economy

what is deflation
What is deflation?

A decrease in the general (average) price level of goods and services in the economy

what is the consumer price index
What is theconsumer price index?

The CPI is an index that measures changes in the average prices of consumer goods and services

who reports the cpi
Who reports the CPI?

The Bureau of Labor Statistics (BLS) of the Department of Labor

how is the cpi calculated
How is the CPI calculated?

Price collectors contact retail stores, homeowners, and tenants in selected cities in the U.S. monthly

which goods and services are included in the cpi
Which goods and services are included in the CPI?

The BLS records average prices for a “market basket” of different items purchased by the typical urban family

slide9

Composition of the CPI

Food and Beverages

Housing

Apparel and Upkeep

Transportation

Medical Care

Recreation

Education & Communication

All other goods & services

16.4%

39.8%

4.8%

17.0%

5.7%

6.1%

5.5%

4.7%

does the makeup of the cpi change
Does the makeup of the CPI change?

As people’s tastes and preferences change, some of the goods and services that go into the basket change

how is the cpi computed
How is the CPI computed?

Current year prices are compared to prices of a similar basket of goods and services in a base year

what is a base year
What is a base year?

A year chosen as a reference point for comparison with some earlier or later year

why is the cpi always 100 in the base year
Why is the CPI always 100 in the base year?

The numerator and the denominator of the CPI formula are the same in the base year

slide14

*CYP = cost of the market basket of products at current-year prices

*BYP = cost of the market basket of products at base-year prices

CPI =

CYP

BYP

X 100

how is the inflation rate computed
How is theinflation rate computed?

The annual inflation rate is computed as the percentage change in the official CPI from one year to the next

slide16

*ARI = Annual rate of inflation

*CPIY = Consumer price index in given year

*CPIPY = Consumer price index in previous year

ARI =

CPI - CPIPY

CPIPY

X 100

slide17

The U.S. Inflation Rate 1929 - 1999

20

16

12

8

4

0

-4

-8

-12

1930

40

50

60

70

80

90

00

what is disinflation
What is disinflation?

A reduction in the rate of inflation

what are some criticisms of the cpi
What are some criticisms of the CPI?
  • It can overstate or understate the impact of inflation for certain groups
  • Does not measure quality
  • Substitutes are ignored
what does inflation do to people s income
What does inflation do to people’s income?

A general rise in prices will shrink people’s income

what is nominal income
What isnominal income?

The actual number of dollars received over a period of time

what is real income
What is real income?

The actual number of dollars received (nominal income) adjusted for changes in the CPI

slide23

*RI = Real income

*NI = Nominal income

*CPI = CPI as a decimal or CPI ÷ 100

RI =

NI

CPI

slide24

%  in nominal income

_

%  in CPI

%  in real income

=

what is wealth
What is wealth?

The value of the stock of assets owned at some point in time

how is wealth affected by inflation
How is wealth affected by inflation?

Inflation can benefit holders of wealth because the value of their assets tends to increase as prices rise

what will cause your real income to decline
What will cause your real income to decline?

The rate of inflation is greater than your rate of income

how does inflation affect borrowers and savers
How does inflation affect borrowers and savers?

They can win or lose depending on the rate of inflation

what is the interest rate
What is theinterest rate?

Interest per year as a percentage of the amount loaned or lent

what is the nominal interest rate
What is thenominal interest rate?

The actual rate of interest earned over a period of time

what is the real interest rate
What is thereal interest rate?

The nominal rate of interest minus the inflation rate

what is demand pull inflation
What isdemand-pull inflation?

A rise in the general price level resulting from an excess of total spending (demand)

when does demand pull inflation occur
When does demand-pull inflation occur?

When the economy is operating at or near full employment

what is cost push inflation
What iscost-push inflation?

A rise in the general price level resulting from an increase in the cost of production

what can cause cost push inflation
What can cause cost-push inflation?

Cost increases for labor, raw materials, construction, equipment, borrowing etc.

do people s expectations affect inflation
Do people’s expectations affect inflation?

Yes, expectations can influence both demand-pull and cost-push inflation

what is hyperinflation
What is hyperinflation?

An extremely rapid rise in the general price level

what is a wage price spiral
What is awage-price spiral?

A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wages and prices

how does the u s inflation rate compare with other countries
How does the U.S. inflation rate compare with other countries?

It is lower than some and higher than others

slide41

Average Annual Inflation Rates 1999

65%

52%

46%

17%

11%

2.6%

2.2%

Turkey

Ecuador

Romania

Mexico

Nicaragua

Greece

U.S.

key concepts43
Key Concepts
  • What is Inflation?
  • What is the Consumer Price Index?
  • Which goods and services are included in the CPI?
  • How is the CPI computed?
  • What is a Base Year?
  • How is the Inflation Rate computed?
  • What is Disinflation?
key concepts cont
Key Concepts cont.
  • What does Inflation do to People’s Income?
  • What is Nominal Income?
  • What is Real Income?
  • What is Wealth?
  • How is Wealth affected by Inflation?
  • How does Inflation affect Borrowers and Savers?
  • What are the two basic types of Inflation?
key concepts cont45
Key Concepts cont.
  • What is Demand-pull Inflation?
  • What is Cost-push Inflation?
  • Do people’s Expectations affect Inflation?
  • What is Hyperinflation?
  • How does the U.S. inflation rate compare with other countries?
slide47

Inflation is an increase in the general (average) price level of goods and services in the economy.

slide48

The consumer price index (CPI) is the most widely known price-level index. It measures the cost of purchasing a market basket of goods and services by a typical household during a time period relative to the cost of the same bundle during a base year. The annual rate of inflation is computed using the following formula:

slide49

*ARI = Annual rate of inflation

*CPIY = Consumer price index in given year

*CPIPY = Consumer price index in previous year

ARI =

CPI - CPIPY

CPIPY

X 100

slide50

Deflation is a decrease in the general level of prices. During the early years of the Great Depression, there was deflation, and the CPI declined at about a double digit rate.

slide51

Disinflation is a reduction in the inflation rate. Between 1980 and 1986, there was disinflation. This does not mean that prices were falling, but only that the inflation rate fell.

slide52

The inflation rate is criticized because (1) it is not representative, (2) it incorrectly adjusts for quality changes, and (3) it ignores the relationship between price changes and the importance of items in the market basket.

slide53

Nominal income is income measured in actual money amounts. Measuring your purchasing power requires converting nominal income into real income, which is nominal income adjusted for inflation.

slide54

The real interest rate is the nominal interest rate adjusted for inflation. If real interest rates are negative, lenders incur losses.

slide55

%  in nominal income

_

%  in CPI

%  in real income

=

slide56

Demand-pull inflation is caused by by pressure on prices originating from the buyers side of the market. On the other hand, cost-push inflation is caused by pressure on prices originating from the seller\'s side of the market.

slide57

Hyperinflation can seriously disrupt an economy by causing inflation psychosis, credit market collapses, a wage-price spiral, and speculation. A wage-price spiral occurs when increases in nominal wages cause higher prices and, in turn, higher wages and prices.

ad