Understanding Economics

Transcription

1 Understanding Economics CHAPTER 10 INFLATION AND UNEMPLOYMENT 1

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4 Learning Objectives In this chapter you will: 1.learn about inflation, how it is measured, and its effect on nominal and real incomes 2.examine the official unemployment rate, the different types of unemployment, and the definition of full employment 4

5 The Consumer Price Index The consumer price index (CPI) is the most common measure of inflation monitors price changes in a representative shopping basket of consumer products includes quantities in a shopping basket determined in a base year compares prices in the current year with those in the base year In the example of the next slide, if the value of this basket rises from $50 to $53.5 during the course of a year, the annual inflation rate is 7 percent, with the consumer price index moving from 100 to 107 5

6 Simple Consumer Price Index Figure 10.1, Page 223 Results of 2003 Survey Prices Quantity Consumed per Month Expenditure per Month Weights Hamburgers Milkshakes $2.00 $ $20 $30 $20 $50 = 0.4 $40 $50 = 0.6 $50 Prices in 2004 Hamburgers Milkshakes Prices $2.20 $ Price 2003 Quantity $2.20 x 10 = $22.00 $1.05 x 30 = $31.50 $

7 What is CPI? CPI = Consumer Price Index Measures overall changes in price of shopping basket of consumer products 7

8 Consumer Price Index Weights (1992) Figure 10.2, Page 224 Health and personal care 4.3% Recreation, education, and reading 10.4% Alcoholic beverages and tobacco products 4.5% Transportation 18.3% Food 18.0% Clothing and footwear 6.6% Household operations and furnishings 10.0% Shelter 27.9% 8

9 Nominal Versus Real Income Nominal income is expressed in current dollars Real income is expressed in base-year dollars equals nominal income divided by CPI (expressed in hundredths) Cost of living: the amount consumers must spend on the entire range of goods and services they buy 9

10 Question What is the real income if nominal income is $1050 and CPI is 1.10 (aka 110%) Real Income = Nominal income/ CPI = $ What does this imply? Consumer s monthly income of $1050 has a purchasing power of $ What income would the consumer need to have the same purchasing power as his monthly income? 10

11 The Limitations of the CPI The CPI does not take full account of consumer differences, since it is based on the consumption patterns of an average household changes in spending patterns since it uses base-year quantities improvements in product quality 11

12 1. Consumer Differences Based on the consumption patterns of an average household

13 2. Changes in Spending Patterns changes in spending patterns since it uses base-year quantities Subjected to technological advances / fad Consumers tend to buy less of items whose prices rise over the time

14 3. Product Quality CPI cannot reflect improvements in product quality that are unmatched by changes in price Example: Stereos have improved tremendously in quality, yet their prices may not have increase proportionally (prices may even fall!) Standard of living may increase because of the increased quality, but this isn t reflected in CPI

15 Project ØCreate a music video on a concept of Economics (Could be ANY concept) ØMusic Video must be around 3 minutes to 5 minutes ØRefer to video: ØShould tell a story / have a theme ØExample: Taylor Swift Blank Space: ØEveryone must be featured (at least in the video); rapping/singing is allowed ØGroups of 4 (max)