Understanding Economics

Transcription

1 Understanding Economics CHAPTER 10 INFLATION AND UNEMPLOYMENT 1

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3 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 3

4 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 4

5 What is CPI? CPI = Consumer Price Index Measures overall changes in price of shopping basket of consumer products 5

6 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% 6

7 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? 7

8 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 5 (max)

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10 The GDP Deflator The GDP deflator indicates price changes for all products appearing in GDP includes quantities that change each year compares prices in the current year with those in a reference year See Figure While the GDP deflator has a value of 100 in 2003, which is the reference year, it rises in proportion with the prices of the economy s output. 10

11 GDP Deflator vs CPI CPI focuses on a small number of consumer items GDP deflator measures price changes for all goods and services produced in the economy and weights them in terms of the economy s total output Advantage: These items are altered annually; increases accuracy of GDP deflator Disadvantage: values for this index not as quickly available (as compared to CPI) GDP Deflator measures the prices of all domestic goods produced and not anything imported CPI includes anything bought by consumers including foreign goods (imported)

12 GDP Deflator vs CPI (Cont d) CPI compares a fixed basket of goods (base year production) GDP deflator compares the prices of currently produced goods to the prices of the same goods in the base year CPI has a fixed basket (and is modified every ~ 5 years) GDP Deflator has changing baskets which reflects current year production

13 Discussion What should I use if I want to estimate my cost of living? CPI will probably tell me all I need to know What should I use If I want to know what is happening to inflation more broadly in the economy? GDP Delfator

14 Simple GDP Deflator (1) Year (2) Output of Microchips (3) Current Price (4) Output at Current Price (2) X (3) (5) Output at 2003 Price (2) X $0.20 (6) GDP Deflator [(4) (5)] x $ $ $

15 Finding Real Gross Domestic Product (1) Year (2) Nominal GDP (current $ billions) (3) GDP Deflator (1997 = 100) (4) Real GDP (1997 $ billions) [(2) (3)] x $ $

16 Nominal Versus Real GDP Nominal GDP is expressed in current dollars Real GDP is expressed in reference-year dollars equals nominal GDP divided by the GDP deflator (expressed in hundredths) 16