Final exam of macroeconomics
david123367
chiang4e_ch06pt1.pptxCHAPTER 17 SLIDE 1
JIM CORWIN / ALAMY
Measuring Inflation and Unemployment
SLIDES CREATED BY ERIC CHIANG
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Define inflation and explain how it is measured.
Use the consumer price index to estimate the effects of inflation on prices.
Describe the main causes of inflation.
Describe the economic consequences of the different forms of inflation.
CHAPTER OBJECTIVES
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INFLATION IS A GENERAL RISE IN PRICES OF GOODS AND SERVICES.
REED SAXON/AP
EMILE WAMSTEKER/BLOOMBERG VIA GETTY IMAGES
TIM BOYLE / GETTY IMAGES
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ALTHOUGH PRICES HAVE RISEN SIGNIFICANTLY OVER TIME, WAGES ROSE EVEN FASTER FOR MOST WORKERS.
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USED WITH PERMISSION FROM MCDONALD’S CORPORATION
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WHAT CAUSES INFLATION?
DEMAND FACTORS—consumer confidence, income, wealth.
SUPPLY SHOCKS—price fluctuations on items such as food and oil.
GOVERNMENT POLICY—its ability to borrow and print money.
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Inflation measures changes in the cost of living. Causes include:
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INFLATION IS MEASURED AGAINST A MARKET BASKET. SOME PRICES RISE AND SOME FALL. BUT OVERALL, THE PRICE LEVEL INCREASES.
PRICE
LEVEL
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MEASURING INFLATION
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Each month, the Bureau of Labor Statistics issues updates on inflation:
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Consumer price index (CPI) measures the retail price level.
Producer price index (PPI) measures wholesale prices.
GDP deflator measures the average price of all items in GDP.
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MEASURING INFLATION
DISINFLATION
A REDUCTION IN THE RATE OF INFLATION. PRICES RISE AT A DECREASING PACE.
DEFLATION
A DECLINE IN THE PRICE LEVEL. PRICES ON AVERAGE FALL.
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CONSUMER PRICE INDEX
MEASURES THE AVERAGE CHANGE IN PRICES PAID BY URBAN CONSUMERS (CPI-U) AND URBAN WAGE EARNERS (CPI-W) FOR A MARKET BASKET OF CONSUMER GOODS AND SERVICES
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CPI is a cost-of-goods index: It compares the cost of a fixed bundle of goods and services from one period to the next.
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CALCULATING CPI AND INFLATION
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Define a base year and find the cost in that year.
Find the current cost and use the following formula to compare costs:
CPI = (cost in current period ÷ cost in base period) 100
% change in price = [(CPI in current year ÷ CPI in original year) 100] − 100
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PROBLEMS WITH THE CPI
CPI measures only private goods.
CPI tends to overstate inflation because it uses a fixed market basket.
Market surveys are three to five years old.
It does not account for product substitution, quality improvements, or new products.
CPI measures only consumers’ out-of-pocket health care expenditures.
It does not measure the overall rise in health care costs.
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THE PRODUCER PRICE INDEX (PPI) MEASURES THE AVERAGE CHANGE IN THE PRICES RECEIVED BY DOMESTIC PRODUCERS FOR THEIR OUTPUT.
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FRENC/DREAMSTIME.COM
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GDP DEFLATOR
AN INDEX OF THE AVERAGE PRICES FOR ALL GOODS AND SERVICES IN THE ECONOMY, INCLUDING ALL COMPONENTS OF GDP: CONSUMPTION, INVESTMENT, GOVERNMENT SPENDING, AND NET EXPORTS
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THE GDP DEFLATOR
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DUSAN PTRICIC/ATRIZANS
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ATTITUDES TOWARD INFLATION
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People living on fixed incomes see their purchasing power decline with inflation. Creditors (lenders) see the real value of their loan repayments fall.
THOSE WHO BENEFIT
THOSE WHO ARE HARMED
Debtors (borrowers) benefit from unanticipated inflation because the real value of their fixed payments falls over time as their wages rise with inflation.
Workers whose wages have escalator clauses. Social Security recipients whose benefits are adjusted with inflation. Banks that properly anticipate inflation.
THOSE WHO ARE UNAFFECTED
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ADJUSTING FOR INFLATION
Price indexes are used to modify payments to account for inflation.
Used to convert nominal values to real values.
Escalator clauses are designed to adjust payments or wages for changes in the price level.
Commercial rental agreements
Labor union contracts
Social Security payments
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ADJUSTING NOMINAL TO REAL VALUES
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Nominal values are converted to real values using the following formula:
Real value = nominal value (base year index ÷ current year index)
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HYPERINFLATION IS AN EXTREMELY HIGH RATE OF INFLATION (AT LEAST 100% PER YEAR).
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ERIC CHIANG
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IN 2008, PRICES IN ZIMBABWE WERE MORE THAN DOUBLING EVERY DAY, AN INFLATION RATE OF 231 MILLION PERCENT. EVEN THE $100 TRILLION BILL BECAME WORTHLESS.
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IMAGES.COM/CORBIS
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CONSEQUENCES OF HYPERINFLATION
Hyperinflation is typically caused by excessive government spending over tax revenues and the printing of money to finance deficits.
Workers are paid frequently, and purchases are made immediately.
Eventually the monetary system breaks down and barter is used. Foreign currencies become valuable as a medium of exchange.
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SUPPOSE THE PRICE LEVEL IS 100 IN THE YEAR 2016, 130 IN YEAR 2017, AND 150 IN YEAR 2018. IN 2018 THIS ECONOMY IS UNDERGOING:
B
C
A
DEFLATION
DISINFLATION
RISING INFLATION
D
HYPERINFLATION
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Answer: B
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SUPPOSE THE PRICE LEVEL IS 100 IN THE YEAR 2016, 130 IN YEAR 2017, AND 150 IN YEAR 2018. IN 2018 THIS ECONOMY IS UNDERGOING: (Answer)
B
C
A
DEFLATION
DISINFLATION (Correct Answer)
RISING INFLATION
D
HYPERINFLATION
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Answer: B
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WHO BENEFITS AND WHO LOSES WHEN UNEXPECTED INFLATION OCCURS?
PRACTICE QUESTION
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IMAGE SOURCE/CORBIS
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Answer: Many people lose when inflation unexpectedly rises: consumers pay more for goods and services, savers see the value of their assets fall, creditors (such as banks and bondholders) see the real values of their payments received fall. Inflation essentially acts as a tax on money held. However, debtors will benefit from unexpected inflation. The real value of payments toward mortgages and student loans falls when inflation rises.
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END OF CHAPTER
SLIDES CREATED BY ERIC CHIANG
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