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Inflation. Frederick University 2014. Definition. A process of irreversible increase in the overall price level, involving a change in relative prices. Typology. According to the form – open and hidden According to the rate of price growth – moderate, galloping, hyperinflation

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Inflation
Inflation

Frederick University 2014


Definition
Definition

A process of irreversible increase in the overall price level, involving a change in relative prices


Typology
Typology

  • According to the form – open and hidden

  • According to the rate of price growth – moderate, galloping, hyperinflation

  • According to expectations anticipated and unanticipated

  • According to source – driven by MS or MD, byAS


Demand pull inflation
Demand pull inflation

CPI

AD

AD’

Y


Supply push inflation
Supply push inflation

CPI

AD

AS

AS’

stagflation

Y


Measurement
Measurement

  • GDP deflator

  • Consumer Price Index (CPI)


Gdp deflator
GDP deflator

  • Nominal GDP – GDP at current prices

  • Real GDP – GDP at constant prices (base year prices – chosen year)

  • Index – the change in the value of an indicator compared to its previous level, taken as a base (= 100)

  • GDP deflator =

    (Nominal GDP: Real GDP) х 100

    GDP deflator is a current year weighted index


Consumer price index
Consumer Price Index

  • Consumer basket

  • Relative shares of goods in the consumer basket - g

  • CPI = [(P1A/ P0A)x g0A + (P1B/P0B)x g0B]x 100

  • Rate of inflation = [(CPI – 100)/100]x 100%

  • CPI is a base year weighted index


Cpi an example

There are two goods in the economy – movies and wine

Р of movies in 2010 г. = €5.

Р of winein 2010 г. = €4.

Qof movies in 2010 г. = 400

Qof wine in 2010 г. = 2000

The cost of consumer basket = 400 x € 5 + 2000 x €4 = =€ 10000

€ 2000 out of these €10000 were spent on movies. This makes 20% or 0.2 of all money spent on movies.

Thus, the relative weight (g) of moviesin 2010 = 0.20

g of wine = 0.80

Р of movies in 2011 = €8

Р of wine in 2011 = €3

CPI = [(8/5) х 0.20 + (3/ 4) x 0.80) x 100 = 93

Rate of inflation =

= (93 -100)/100 x 100% = = -7%

If the CPI were above 100, the rate of inflation would have been positive.

CPI an example


The phillips curve
The Phillips curve

LRPC

Rate of

inflation

Z’

W’

SRPC’

Z

SRPC1

W

V

U

U’

U*


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