紅石國際教育中心. Red Rock Institute & Publishing. Inflation

Transcription

1 紅石國際教育中心 Red Rock Institute & Publishing Inflation

2 What is Inflation? The general upward movement in the average level of prices of the goods and services in an economy

3 What is Deflation? The general decrease in the average level of prices of the goods and services in an economy What the state of Inflation/Deflation around the world?

4 How is Inflation measured? Consumer Price Index (CPI)? A measure of the cost of a fixed market basket of consumer goods and services Refer to EconEd Link handout Statistics CPI South-Western College Publishing

5 How is the CPI calculated? CPI = Value of the market basket in the current period Value of the market basket in the base period x 100 = PRICE INDEX (See Handout)

6 If the value of the CPI equals 120, what does this mean? The fixed market basket of goods costs 20% more than in the base period of time

7 Does the makeup of the CPI change? As people s tastes and preferences change, what goes into the basket will change The price of G/S in the base year of How could measuring the CPI be distorted? 1999 South-Western College Publishing

8 GDP Deflator more broad GDP Deflator includes prices for all goods that we produce: 1.What householders are buying 2.What businesses are buying 3.What the government is buying 4.What foreigners [does are buying does not include imports because we don t produce imports]

9 What are the effects of unexpected inflation? Inflation redistributes income some people win the ones getting the higher prices (think oil/gas companies) Some people lose the ones paying the higher prices (think YOU!)

10 Who wins and who loses from inflation? Debtors win Borrowers pay back loans with inflated dollars (dollars that are worth less) Creditors lose Lenders are paid back with inflated dollars (dollars that are worth less)

11 More winners and losers of inflation Those on fixed incomes lose Income does not keep up with prices - standard of living goes down. Exception if fixed income is INDEXED to inflation (CPI) Savers often lose If prices rise faster than the rate of interest they are getting from their savings (investment) then they lose purchasing power Government sometimes wins Government wins Biggest debtor in the World (Debtors WIN!) Government loses surplus in savings, increase in salaries and other prices paid Menu costs of inflation Individuals and business must allocate resources to keep up with changing prices increases transaction costs Inflation and uncertainty Do I spend today, or save? Prices going up or not? What is happening to my purchasing power? ARRRGGHH!

12 The Inflation-GDP-Unemployment Connection GDP is calculated by taking the price of a good or service and multiplying it by the quantity of the good or service produced. Example (assume a one product economy) Dry Erase Marker (sold this year) $1.00 (Price of one) X 1,000 produced this year GDP = $1,000

13 The Inflation-GDP-Unemployment Connection Let s assume next year the price of Dry Erase Markers is $2.00 each and the economy still produces 1,000 markers. $2.00 X 1,000 GDP = $2,000 Has our GDP grown? What caused GDP to rise? Is this good? What should be our main concern?

14 The Inflation-GDP-Unemployment Connection Our main concern should be the growth of the production of goods and services (G/S). The implication is that with the growth of production of G/S more workers will be needed to produce the G/S, thereby putting people to work and getting closer to the Economic Goal of Fullemployment.

15 The Inflation-GDP-Unemployment Connection Our example tells us that we only experienced a rise in price, not a rise in the quantity of the good produced. We had inflation. To see how we are doing from year to year in the production of G/S we need to factor out Inflation

16 The Inflation-GDP-Unemployment Connection Terms we need to know and understand: Nominal GDP the GDP calculated in any given year using that particular years prices or price level. Real GDP the GDP calculated for a given year with the change in price level (Inflation) factored out. Measures the production of G/S in terms of a base year price level GDP Deflator- calculates the change in price level for a particular year compared to an established base year price level.

17 Year Price of Goods and Services Produced Quantity of Goods and Services Produced Nominal GDP (unadjusted for Price Change) GDP Deflator Real GDP (adjusted for Price Change) , , , , ,150 Nominal GDP = Price of G&S x Quantity of G &S GDP Deflator = Current Price/Base Year Price Real GDP = Nominal GDP/GDP Deflator X 100

18 What does all this mean??? Unemployment Inflation GDP Real Growth Rate Good 6% or less 1% to 4% 2.5% to 5% Worry 6.5% to 8% 5% to 8% 1% to 2% Bad 8.5% or more 9% or more.5% or less Unemployment Rate 9.7 % Inflation Rate -2.10% Real GDP -6.0%

19 IT IS A MUST TO REMEMBER THIS FORMULA: Real = Nominal - Inflation GDP Interest rate GDP Interest rate