Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
SlideShare a Scribd company logo

Inflation Phenomenon economic course (2).ppt

•Download as PPT, PDF•
•
S
samahfathi31

This document discusses inflation and deflation, including how they are defined and measured. It explains that inflation is a persistent increase in prices, while deflation is a persistent decrease in prices. Inflation is measured using the Consumer Price Index (CPI), which tracks the prices of goods and services in an average consumer's basket. Calculating the CPI involves selecting consumer goods, surveying prices each month, and using a formula to determine changes in the overall price level compared to a base period. High and unpredictable inflation can negatively impact economies by redistributing wealth and lowering production.

1 of 15
© 2012 Pearson Education Inflation Prof. Zeinab EL Gawady
© 2012 Pearson Education Price Level, Inflation, and Deflation The price level is the average level of prices and the value of money. A persistently rising price level is called inflation. A persistently falling price level is called deflation.‫انكماش‬ We are interested in the price level because we want to 1. Measure the inflation rate or the deflation rate 2. Distinguish between money values and real values of economic variables.
© 2012 Pearson Education Money and Inflation If expenditure rise faster the nation’s capacity to produce goods and services inflation occurs. Inflation: is a persistent ‫مستمرة‬ ‫زيادة‬ increase in a nation general level of prices. Note: Countries with high rates of money growth systemically experienced high rates of inflation.
© 2012 Pearson Education Why Inflation and Deflation Are Problems Low, steady‫ثابت‬, and anticipated inflation ‫متوقع‬ or deflation is not a problem. Unpredictable inflation or deflation is a problem because it  Redistributes income and wealth  Lowers real GDP and employment  Diverts resources from production Price Level, Inflation, and Deflation
© 2012 Pearson Education Price Level, Inflation, and Deflation The Consumer Price Index The Consumer Price Index, or CPI, ‫الرقم‬ ‫القياسي‬ ‫السعار‬ ‫المستهلك‬measures the average of the prices paid by urban consumers for a “fixed” basket of consumer goods and services.
© 2012 Pearson Education Price Level, Inflation, and Deflation Reading the CPI Numbers The CPI is defined to equal 100 for the reference base period. Currently, the reference base period is 19821984. That is, for the average of the 36 months from January 1982 through December 1984, the CPI equals 100. In June 2010, the CPI was 218. This number tells us that the average of the prices paid by urban consumers for a fixed basket of goods was 118 percent higher in June 2010 than it was during 19821984.
© 2012 Pearson Education Price Level, Inflation, and Deflation Constructing the CPI Constructing the CPI involves three stages:  Selecting the CPI basket  Conducting a monthly price survey  Calculating the CPI
© 2012 Pearson Education Price Level, Inflation, and Deflation The CPI Basket The CPI basket is based on a Consumer Expenditure Survey, which is undertaken infrequently. The CPI basket today is based on data collected in the Consumer Expenditure Survey of 2008.
© 2012 Pearson Education Price Level, Inflation, and Deflation Figure 5.6 illustrates the CPI basket. Housing is the largest component. Transportation and food and beverages are the next largest components. The remaining components account for 26 percent of the basket.
© 2012 Pearson Education Price Level, Inflation, and Deflation The Monthly Price Survey Every month, BLS employees check the prices of the 80,000 goods in the CPI basket in 30 metropolitan areas. Calculating the CPI 1. Find the cost of the CPI basket at base-period prices. 2. Find the cost of the CPI basket at current-period prices. 3. Calculate the CPI for the current period.
© 2012 Pearson Education Price Level, Inflation, and Deflation Let’s work an example of the CPI calculation. In a simple economy, people consume only oranges and haircuts. The CPI basket is 10 oranges and 5 haircuts. The table also shows the prices in the base period. The cost of the CPI basket in the base period was $50.
© 2012 Pearson Education Price Level, Inflation, and Deflation Table 5.1(b) shows the fixed CPI basket of goods. It also shows the prices in the current period. The cost of the CPI basket at current-period prices is $70.
© 2012 Pearson Education Price Level, Inflation, and Deflation The CPI is calculated using the formula: CPI = (Cost of basket at current-period prices ÷ Cost of basket at base-period prices) X 100. Using the numbers for the simple example, CPI = ($70 ÷ $50) X 100 = 140. The CPI is 40 percent higher in the current period than it was in the base period.
© 2012 Pearson Education Price Level, Inflation, and Deflation Measuring the Inflation Rate The major purpose of the CPI is to measure inflation. The inflation rate is the percentage change in the price level from one year to the next. The inflation formula is: Inflation rate = [(CPI this year – CPI last year) ÷ CPI last year]  100.
© 2012 Pearson Education Suppose that consumers in Dexter consumed only books and pens. The prices and quantities for 2010 and 2011 are listed in the table above. If the reference base period for Dexter's CPI is 2010, and the CPI basket has not been updated since 2010, calculate the following. 1. The CPI in 2010 and 2011. 2. The inflation rate in 2011. 3. Give an accurate definition for “inflation”, describe the negative effects of inflation. 4. “The CPI inflation may overstate the true inflation”. Do you agree with this statement? Justify your answer. 2011 2010 Item O Q P Q $50 8 $30 10 Books $2 15 $1 20 Pens

More Related Content

Inflation Phenomenon economic course (2).ppt

  • 1. © 2012 Pearson Education Inflation Prof. Zeinab EL Gawady
  • 2. © 2012 Pearson Education Price Level, Inflation, and Deflation The price level is the average level of prices and the value of money. A persistently rising price level is called inflation. A persistently falling price level is called deflation.‫انكماش‬ We are interested in the price level because we want to 1. Measure the inflation rate or the deflation rate 2. Distinguish between money values and real values of economic variables.
  • 3. © 2012 Pearson Education Money and Inflation If expenditure rise faster the nation’s capacity to produce goods and services inflation occurs. Inflation: is a persistent ‫مستمرة‬ ‫زيادة‬ increase in a nation general level of prices. Note: Countries with high rates of money growth systemically experienced high rates of inflation.
  • 4. © 2012 Pearson Education Why Inflation and Deflation Are Problems Low, steady‫ثابت‬, and anticipated inflation ‫متوقع‬ or deflation is not a problem. Unpredictable inflation or deflation is a problem because it  Redistributes income and wealth  Lowers real GDP and employment  Diverts resources from production Price Level, Inflation, and Deflation
  • 5. © 2012 Pearson Education Price Level, Inflation, and Deflation The Consumer Price Index The Consumer Price Index, or CPI, ‫الرقم‬ ‫القياسي‬ ‫السعار‬ ‫المستهلك‬measures the average of the prices paid by urban consumers for a “fixed” basket of consumer goods and services.
  • 6. © 2012 Pearson Education Price Level, Inflation, and Deflation Reading the CPI Numbers The CPI is defined to equal 100 for the reference base period. Currently, the reference base period is 19821984. That is, for the average of the 36 months from January 1982 through December 1984, the CPI equals 100. In June 2010, the CPI was 218. This number tells us that the average of the prices paid by urban consumers for a fixed basket of goods was 118 percent higher in June 2010 than it was during 19821984.
  • 7. © 2012 Pearson Education Price Level, Inflation, and Deflation Constructing the CPI Constructing the CPI involves three stages:  Selecting the CPI basket  Conducting a monthly price survey  Calculating the CPI
  • 8. © 2012 Pearson Education Price Level, Inflation, and Deflation The CPI Basket The CPI basket is based on a Consumer Expenditure Survey, which is undertaken infrequently. The CPI basket today is based on data collected in the Consumer Expenditure Survey of 2008.
  • 9. © 2012 Pearson Education Price Level, Inflation, and Deflation Figure 5.6 illustrates the CPI basket. Housing is the largest component. Transportation and food and beverages are the next largest components. The remaining components account for 26 percent of the basket.
  • 10. © 2012 Pearson Education Price Level, Inflation, and Deflation The Monthly Price Survey Every month, BLS employees check the prices of the 80,000 goods in the CPI basket in 30 metropolitan areas. Calculating the CPI 1. Find the cost of the CPI basket at base-period prices. 2. Find the cost of the CPI basket at current-period prices. 3. Calculate the CPI for the current period.
  • 11. © 2012 Pearson Education Price Level, Inflation, and Deflation Let’s work an example of the CPI calculation. In a simple economy, people consume only oranges and haircuts. The CPI basket is 10 oranges and 5 haircuts. The table also shows the prices in the base period. The cost of the CPI basket in the base period was $50.
  • 12. © 2012 Pearson Education Price Level, Inflation, and Deflation Table 5.1(b) shows the fixed CPI basket of goods. It also shows the prices in the current period. The cost of the CPI basket at current-period prices is $70.
  • 13. © 2012 Pearson Education Price Level, Inflation, and Deflation The CPI is calculated using the formula: CPI = (Cost of basket at current-period prices ÷ Cost of basket at base-period prices) X 100. Using the numbers for the simple example, CPI = ($70 ÷ $50) X 100 = 140. The CPI is 40 percent higher in the current period than it was in the base period.
  • 14. © 2012 Pearson Education Price Level, Inflation, and Deflation Measuring the Inflation Rate The major purpose of the CPI is to measure inflation. The inflation rate is the percentage change in the price level from one year to the next. The inflation formula is: Inflation rate = [(CPI this year – CPI last year) ÷ CPI last year]  100.
  • 15. © 2012 Pearson Education Suppose that consumers in Dexter consumed only books and pens. The prices and quantities for 2010 and 2011 are listed in the table above. If the reference base period for Dexter's CPI is 2010, and the CPI basket has not been updated since 2010, calculate the following. 1. The CPI in 2010 and 2011. 2. The inflation rate in 2011. 3. Give an accurate definition for “inflation”, describe the negative effects of inflation. 4. “The CPI inflation may overstate the true inflation”. Do you agree with this statement? Justify your answer. 2011 2010 Item O Q P Q $50 8 $30 10 Books $2 15 $1 20 Pens