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					Economic Issues
•   Economic Growth
•   Business Cycles
•   Unemployment
•   Inflation




              Chapter 6 (c) Inflation   1
Inflation
• A continual rise in the overall price
  level of goods and services.
• Since World War II, the U.S. inflation
  rate has remained positive and
  relatively stable.



               Chapter 6 (c) Inflation     2
Inflation
• Measurement of Inflation
  – A price index is a composite of
    prices that summarizes what
    happens to prices of a selection of
    goods (a market basket of goods)
    over time.
  – Examples:
    • Producer Price Index
    • Consumer Price Index


               Chapter 6 (c) Inflation    3
  Inflation
• The Producer Price Index (PPI)
  – Measures changes in composite
    prices of a number of important raw
    materials, such as steel.
  – Gives an early indication as to where
    inflation is headed.



                 Chapter 6 (c) Inflation    4
  Inflation
• The Consumer Price Index (CPI)
  – Measures the prices of a fixed "basket"
    of consumer goods, weighed according
    to each component's share of an
    average consumer's expenditures.




                 Chapter 6 (c) Inflation      5
               Composition of CPI
Food and beverage (17.3%)

Housing                                               Clothing (5.5%)
(41.3%)

                                                              Transportation
                                                              (17%)



                                                           Medical care (7.4%)

Other (7.1%)                                            Entertainment (4.4%)


                            Chapter 6 (c) Inflation                              6
Inflation




            Chapter 6 (c) Inflation   7
Inflation
• The GDP Deflator
  – A measure of inflation that includes the
    widest number of goods and services.




                Chapter 6 (c) Inflation        8
 Inflation
• Nominal and Real Concepts
  – Nominal output is the total amount of
    goods and services as measured by
    current prices.
  – Real output is the total amount of goods
    and services produced, less inflation.



                 Chapter 6 (c) Inflation       9
Inflation
• Why does inflation occur?
  – Demand-pull inflation is the inflation
    that occurs when there is excessive
    demand.
  – Excessive demand might be caused by
    increased demand in the government
    and/or the consumer sector.



                Chapter 6 (c) Inflation      10
Demand-Pull Inflation
                                        S0




         P1
 Price




                                                  D1
         P0


                                             D0


                      Q0     Q1

                       Quantity


              Chapter 6 (c) Inflation                  11
  Inflation
• Why does inflation occur?
  – Cost-push inflation is the inflation that
    occurs when there are restrictions on
    supply.
  – Full employment of primary resources,
    like labor, or supply shocks caused by
    natural disasters, can contribute to
    rising prices.

                  Chapter 6 (c) Inflation       12
Cost-Push Inflation

                                      S1
                                              S0




        P1
Price




        P0



                                              D0
                     A            B
             0           Qa
                 (0-A)        (A-B)
                                  Quantity


                    Chapter 6 (c) Inflation        13
  Inflation
• Expected inflation is that which people
  anticipate.
• Unexpected inflation is that which
  surprises people.




                Chapter 6 (c) Inflation     14
Inflation
• Results of Inflation
  – Inflation causes income to be
    redistributed from those who do not
    raise their prices to those who do.
     • For example, from lenders to borrowers.




                Chapter 6 (c) Inflation          15
Economic Issues and Government

  Should government be
  responsible for economic
  growth, business cycle
  fluctuations, unemployment
  and inflation?



            Chapter 6 (c) Inflation   16
Economic Issues and Government
The Classical school of economics
believes that economic activity
should be determined in the private
sector and government should play a
limited role.



              Chapter 6 (c) Inflation   17
Economic Issues and Government

Keynesian school of economics
suggests that government should
play an active role in economic
activity.



     John Maynard Keynes
               Chapter 6 (c) Inflation   18
    Employment Act of 1946
• Government took responsibility for:
  – economic growth
  – full-employment
  – stable prices




                Chapter 6 (c) Inflation   19

				
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