Motivated Monday, November 5 (No school tomorrow!)

Transcription

1 Motivated Monday, November 5 (No school tomorrow!) Learning targets: I can research inflation and CPI and I can review GDP and unemployment. (Sub work from Friday) New USATP is up Unit 2 test Nov. 13 and 14

2 Westerly Wednesday, November 7 Thought-provoking Thursday, November 8 Warm up: Do the first three released multiple-choice questions in your problem set. Learning target: I can define inflation and CPI. I can calculate inflation. Unit 2 test next Tues/Wed

3 Class Expectations When I am giving you notes or instructions: Sit up, listen, take notes, remain silent, raise your hand for questions. During independent work: I will be working with each group during class. Your group must be on task at all times, seated, and with voices at a reasonable level.

4 2008 Audit Exam

5 2012 Audit Exam

6 2013 Audit Exam

7 2006 Practice FRQ--See problem set Copyright 7

8 2006 Practice FRQ Copyright 8

9 Unit 2: Macro Measures -Price Stability Copyright 9

10 What was the average price of a loaf of bread in cents 10 cents 12 cents 22 cents 25 cents 50 cents 70 cents $2.79 $1.98 What happened to the bread??? Today s bread is not drastically different that the bread of 1930 It takes MORE dollars to buy essentially the SAME product today. THIS IS INFLATION!

11 Goal #3 LIMIT INFLATION Copyright Country and TimeZimbabwe, 2008 Annual Inflation Rate79,600,000,000% Time for Prices to Double24.7 hours

12 What is Inflation? Inflation is rising general (average) level of prices and it reduces the purchasing power of money. When inflation occurs, each dollar of income will buy fewer goods than before. Copyright

13 What is Inflation? Our central bank (the Federal Reserve) typically sets a goal for annual inflation of 2%

14 Variations on inflation: Deflation is when the general level of prices is falling. Deflation is bad because people will hoard money (financial assets). This decreases consumer spending and GDP. Hyperinflation is unusually rapid/extreme inflation. Disinflation- Prices increasing at slower rates (i.e., inflation slows but price-level still increasing).

15 The amount of Venezuelan Bolivars (worth $1.45) needed to buy 1kg of meat. photo credit: Reuters

16 What is Inflation? With a partner, guess how much you would need in today s money to have the same purchasing power as $100 in the following years: 1. June, May, October, 2000 Copyright

17 What countries had the highest inflation rates in 2017? 1. Venezuela % due to political unrest and government printing money to pay debt. 2. South Sudan % due to civil war and failed monetary policy. 3. Suriname - 77% due to bad policy and economic mismanagement. 4. Argentina - 22% is an improvement from recent years. We tend to see higher inflation rates in developing nations Why do you think that is?

18 Is Inflation Good or Bad? 1. If a high inflation rate is predicted, how would different groups of people react? 2. What do you think would happen to people s willingness to lend money? 3. What do you think would happen to people s willingness to save? What if prices are expected to drop? Copyright

19 Good or Bad? In general, rampant inflation is bad because banks don t lend and people don t save. This decreases Investment and GDP. Copyright

20 Effects of Unanticipated Inflation Hurt by Inflation Lenders-People who lend money (at fixed interest rates). People with fixed incomes. Savers Helped by Inflation Borrowers-People who borrow money. A business where the price of the product increases faster than the price of resources. If there is inflation, ask your boss for a raise! Copyright

21 But inflation doesn t effect everyone equally. See problem set... Identify which people are helped and which are hurt by unanticipated inflation. 1. A man who lent out $500 to his friend in 1960 and gets paid back in A tenant who is charged $850 rent each year. 3. An elderly couple living off fixed retirement payments of $2000 a month. 4. A man that borrowed $1,000 in 1995 and paid it back in A woman who saved $500 in 1950 by putting it under her Copyright mattress.

22 Nominal Wage- Wage measured by dollars rather than purchasing power. Real Wage- Wage adjusted for inflation.

23 $60,000 Pyramid Review

24 NAME THAT CONCEPT 1. Macroeconomics 2. Inflation 3. Justin Bieber 4. Nominal GDP 5. What the Tooth Fairy might say 6. Structural Unemployment 7. C+I+G+Xn Copyright

25 NAME THAT CONCEPT 1. REAL GDP 2.What a baseball player might say. 3.CYCLICAL UNEMPLOYMENT 4. Absolute advantage 5. FRICTIONAL UNEMPLOYMENT 6. Beyonce 7. GDP per capita Copyright

26 Has the minimum wage increased, decreased, or stayed the same since 1970?

27 Copyright

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29 Where do you think the goods/services below belong on the graph? TVs College Tuition New Cars Hospital Services Toys

30 How is inflation measured? The government tracks the prices of specific market baskets that included the same goods and services. There are two ways to look at inflation over time: The Inflation Rate- The percent change in prices from year to year. Price Indices- Index numbers assigned to each year that show how prices have changed relative to a specific base year. Examples: The U.S. inflation rate in 2014 was 0.8%. The Consumer Price Index for 2014 was 235 (base year 1982). This means that prices have increased 135% since Copyright

31 Calculating the Market Basket Good Year 1 Year 2 Year 3 1 lb of Apples $1.00 $2.00 $ lb of Bananas $.25 $.50 $.75 1 Gallon Milk $1.75 $2.50 $2.75 $3.00 $5.00 $6.00 Cost of Market Basket (COMB) To get the cost of the basket, add up the prices of all items in the basket in a given year. The cost of each year s market basket can then be used to create a price index. In the case above, these are items that would likely be included in the Consumer Price Index, or CPI, because they are items that consumers would normally purchase.

32 Consumer Price Index (CPI) The most commonly used measurement of inflation for consumers is the Consumer Price Index (CPI). Here is how it works: The base year is given an index of 100. To compare, each year is given an index # as well. CPI = Copyright Price of market basket Price of market basket in base year x 100

33 Finally Friday, November 9 Mostly Monday, November Identify the 3 goals of all economies. Define Natural Rate of Unemployment. Define inflation rate. What is a market basket? Explain the difference between nominal and real interest rates. How do you calculate CPI? How do you calculate unemployment? What is the formula for the labor force participation rate? Who is helped and hurt by inflation? List 10 old-school Nintendo games.

34 Finally Friday, November 9 Mostly Monday, November 12 Warm up: Quiz your neighbor on the definitions and formulas for the following: real GDP, unemployment and inflation. Learning targets: I can calculate CPI and inflation. I can compare CPI with the GDP deflator. Unit 2 test is next Tuesday/Wednesday. Turn in study guide day of test to be eligible for test corrections. S.G. is posted on Edmodo.

35 The Consumer Price Index (CPI) The change in CPI from year to year is the most common way to measure inflation. The basis of cost of living adjustments (COLAs) in many contracts and in Social Security. CHAPTER 24 MEASURING THE COST OF LIVING

36 How the CPI Is Calculated Fix the basket. The Bureau of Labor Statistics (BLS) surveys consumers to determine what s in the typical consumer s shopping basket. Find the prices. The BLS collects data on the prices of all the goods in the basket. Compute the basket s cost. Use the prices to compute the total cost of the basket. Then, compare the CPI from one year to the next to determine inflation.

37 How the CPI Is Calculated 4. Choose a base year and compute the index. The CPI in any year equals: 100 x cost of basket in current year cost of basket in base year 5. Compute the inflation rate. The percentage change in the CPI from the preceding period. CPI this year CPI last year inflation x 100% = CPI last year rate CHAPTER 24 MEASURING THE COST OF LIVING

38 Calculating the Market Basket Good Year 1 Year 2 Year 3 1 lb of Apples $1.00 $2.00 $ lb of Bananas $.25 $.50 $.75 1 Gallon Milk $1.75 $2.50 $2.75 $3.00 $5.00 $6.00 Cost of Market Basket (COMB) Use Year 1 as the Base Year What is the CPI for Year 1? 100 What is the CPI for Year 2? 167 What is the CPI for Year 3? 200 If the base year has an index of 100, what does the index in year 2 mean??

39 Calculating CPICPI Year 1 COMB in a given yr 3 $40 $50 $90 4 $160 5 $100 2 COMB in base yr (Year 1 as Base Year) Inflation Rate N/A $ $ % $ % $40 $40 Make year one the base year 78% -38%

40 Calculating CPICPI Year 1 COMB in a given yr 3 $40 $50 $90 4 $160 5 $100 2 COMB in base yr (Year 1 as Base Year) Inflation Rate N/A $ $ % $ % $40 $40 Make year one the base year 78% -38%

41 Calculating CPICPI Units of Output Price Per Unit 1 10 $ $ $ $ $4 Year COMB in a given yr COMB in base yr $40 $50 $60 $80 $40 $40 $40 (Year 1 as Base Year) $ $ $ Inflation Rate N/A 25% 20% 33.3% -50% Inflation rate formula: % Change in Prices = Year 2 CPI - Year 1 CPI Year 1 CPI x 100

42 Calculations--Problem Set 1. In an economy, Real GDP (base year = 1996) is $100 billion and the Nominal GDP is $150 billion. Calculate the GDP deflator. 2. In an economy, Real GDP (base year = 1996) is $125 billion and the Nominal GDP is $150 billion. Calculate the GDP deflator. 3. In an economy, Real GDP for year 2002 (base year = 1996) is $200 billion and the GDP deflator 2002 (base year = 1996) is 120. Calculate the Nominal GDP for In an economy, Nominal GDP for year 2005 (base year = 1996) is $60 billion and the GDP deflator 2005 (base year = 1996) is 120. Calculate the Real GDP for Copyright

43 Why is college tuition rising so much faster than inflation? Assign groups of students one of the below articles to read and discuss. Some possible discussion questions are below. As a class, discuss what was read. Are there any suggested solutions? How will students who want to attend college prepare for this? o-much.html ege-board-report-shows

44 Practice Units of Price Year Output Per Unit 1 10 $ $ $ Nominal, GDP Real, GDP $40 $50 $90 $60 $60 $90 GDP Deflator Year 3 as Base Year N/A % % % % $160 $120 $100 $ $4 Make year THREE the base year Nominal GDP = quantity x price in given year Real GDP = quantity x price in base year $8

45 CPI vs. GDP Deflator The GDP deflator measures the prices of all goods produced, whereas the CPI measures prices of only the goods and services bought by consumers. An increase in the price of goods bought by firms or the government will show up in the GDP deflator but not in the CPI. The GDP deflator includes only those goods and services produced domestically. Imported goods are not a part of GDP and therefore don t show up in the GDP deflator. GDP Deflator Copyright = Nominal GDP Real GDP x 100

46 CPI vs. GDP Deflator If the nominal GDP in 09 was 25 and the real GDP (compared to a base year) was 20 how much is the GDP Deflator? GDP Deflator Copyright = Nominal GDP Real GDP x 100

47 Calculating GDP Deflator GDP Deflator Nominal GDP Copyright = = Nominal GDP Real GDP x 100 (Deflator) x (Real GDP) 100

48 Economists use multiple price indices - not just the CPI or GDP Deflator. Why might it be important for economists to understand price changes in these different categories?

49 2008 Audit Exam

50 2012 Audit Exam

51 2012 Audit Exam