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Inflation

Inflation. Inflation – Macroecon - Unit 2. Which car costs more?. Inflation is a general increase in prices. When thinking about inflation though, you need to keep in mind …. prices. …. In the good old days ________ were much lower, but _________ were much lower also. wages.

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Inflation

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  1. Inflation Inflation – Macroecon - Unit 2

  2. Which car costs more?

  3. Inflation is a general increase in prices. When thinking about inflation though, you need to keep in mind …. prices …. In the good old days ________ were much lower, but _________ were much lower also. wages To compare costs over time we look at purchasing power – the ability to purchase goods and services.

  4. guess 3rd guess 2nd guess 1st 4,696 1,638 1,240 To determine which car costs more we look at how many hours you would have to work to earn the money to buy the car.

  5. Who has more purchasing power with her salary? Full-time student minimum wage 1982 = $_____/hr $2.25/hr has the same purchase power as $______/hr in 2007 2.25 4.83 Full-time student minimum wage 2008 = $_____/hr 6.90 http://www.measuringworth.com/calculators/ppowerus/

  6. Anticipate ... for which teen are these things cheaper? $ 3.37 $ 2.69 $1.59 $ 2.53 $ 2.79 $ 1.19 $ 5.84 $ 9.50 $ 2.75 $ 89.90 $ 54.90 $ 116.51 $ 1,167.17 6 of 28 $ 75.00 $ 550.00 http://www.thepeoplehistory.com/ http://www.westegg.com/inflation/

  7. To measure inflation economists study the price level – the cost of goods & services in an economy at any given point in time. We determine what the price level was by creating a price index – a measurement that shows how the average price of a standard group of goods changes over time.

  8. The best-known index is the CPI – Consumer Price Index published monthly. Each month BLS workers look at the prices of a representative basket of _______ and services that most American families buy to see if prices have __________ or __________. goods increased decreased 8 of 28

  9. What’s in our market basket? 6.2% medical care 5.6% recreation education & communication 6.1% 42.4% other tobacco & personal care products 3.2% housing 3.7% apparel food 14.9% transportation 17.6% Guess which category we spend the most on and its percentage weight. Data from Sep. 2008, www.bls.gov/cpi/cpid0809.pdf

  10. How do we calculate the CPI? 1st – BLS picks a base year (currently 1984) and assigns it an index of 100 2nd – BLS looks at what the market basket of goods costs in the new year divided by the cost in the base year. updated cost = CPI x 100 base period cost $ 440 200 CPI for 2008 = _____ x 100 = $ 220

  11. We then use the CPI INDEX to calculate inflation: Inflation Rate for 2008 -- CPI for 2008 CPI for 2007 x 100 = CPI for 2007 You’re trying to get at ... what percent higher are prices this year? 188.9 (CPI for 2004) 184.0 (CPI for 2003) Inflation Rate for 2004 -- x 100 = 184.0 (CPI for 2003) 2.7 _____% =

  12. Inflation between 1% – 3% doesn’t cause problems. Inflation > 5% can cause problems

  13. 2008 inflation rate = 4%– 5%

  14. CPI Weighing website showing actual contents of market basket Potential problems with the CPI Consumers’ preferences change  Huge variations in prices in different cities  Substitution bias – if one thing gets more expensive, then consumers will.....

  15. Hyper inflation Germany 15 of 28 bowdoin college / academics / economics / courses / economics 100 / resources / powerpoints /

  16. Which President earned more in real money? Which deserved more? Presidential Pay in Current and Constant Dollars http://www.presidentsusa.net/

  17. http://oregonstate.edu/cla/polisci/faculty-research/sahr/sumprpay.pdfhttp://oregonstate.edu/cla/polisci/faculty-research/sahr/sumprpay.pdf

  18. A. Causes of Inflation [1] demand-pull inflation – excessive demand, if demand is growing faster than the level of production, prices will increase. [2] cost push inflation – firms’ costs rise; wage increases, gov’t taxes, exchange rates needed for purchasing materials abroad.

  19. wage-price spiral = an example of cost-push inflation

  20. A. Causes of Inflation [3] money supply increases – with more money floating in the economy people will pay more for goods

  21. B. Costs of Inflation (1) redistributes income – from people who cannot raise prices to those people who do; arbitrary; affects people on fixed income like a pension (2) information skewed – prices change but so does income; hard to know what is relatively a good price or not

  22. B. Costs of Inflation (3) competitiveness – if one country’s prices increasing but other country’s prices not, then will impact sales (4) uncertainty – if inflation is varying firms reluctant to invest in new plant and equipment; people reluctant to spend

  23. C. 2 Types of Inflation Anticipated Inflation – people have built expected inflation into their economic decisions. Unanticipated Inflation – not foreseen; but while some are hurt by unanticipated inflation, others may benefit 25 of 28

  24. Wells Fargo Bank extends a $50,000 loan to the owner of El Zócalo to put in new kitchen equipment. The loan is to be repaid over the next 10 years. Unanticipated Inflation takes off at 10%. Wells Fargo hurt or made gains or unaffected El Zócalo hurt or made gains or unaffected

  25. D. Phillips Curve Phillips Curve shows trade off between unemployment & inflation Inflation Phillips Curve Unemployment Based on the curve above, reducing unemployment will likely __________ inflation. increase

  26. AP workbook p. 75 & 76, Activity 13 AP workbook p. 81, Act. 15 numbers 1-5 only work with a small group 15 min 28 of 28

  27. Website with fun activities to do with inflation Go Back in Time http://qrc.depaul.edu/djabon/cpi.htm

  28. Let’s look at purchasing power of salary. Guess: Teacher -- Starting Salary, 4-year degree, NC, 1993 $19,000 Teacher -- Starting Salary, 4-year degree, Chandler, 2007 $34,000 Who has more purchasing power with her salary? teacher in 1993 or 2007? $ 19,000 in 1993 would buy the same as $ 26,944 in 2007 19 of 30

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