What is inflation Define inflation How does it affect the economy a rise in the general price level It causes rising prices for goods and services It reduces purchasing power for individuals ID: 782506
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Slide1
Inflation and Stagflation
Slide2What is inflation?
Define inflation. How does it affect the economy?
a rise in the general price level.
It causes rising prices for goods and services.
It reduces purchasing power for individuals.
It causes money to lose its value over time.
Slide3What is Deflation?
Define deflation. How does it affect the economy?
a reduction of the general price levels .
It causes falling prices.
It usually accompanies falling demand and economic problems.
It increases the value of money.
Slide4What is Disinflation?
Disinflation means that the rate of inflation is declining.
It just means that there is a lower rate of inflation than the year before.
It is not a bad thing. It is different than deflation.
Slide5What is inflation rate?
The inflation rate is the annual rate at which prices increase. It is measured using the following formula.
Typical rate of inflation in the United States is about 2.5% every year.
Slide6What is inflation?
Compare creeping inflation, galloping inflation, and hyperinflation.
Creeping inflation: a slow rate of inflation , in the range of 1-3% a year
Galloping inflation: an intense form of inflation that can go as high as 100-300%
Hyperinflation: inflation in the range of 500% and above
Slide7What is a Price Index
A statistical series that can be used to measure changes in prices over time.
Consumer Price Index
Producer Price Index
Slide8Price Index
Consumer Price Index (CPI)
Index that reports on price changes for about 90,000 items in 364 categories.
It is calculated by the US Bureau of Labor Statistics.
Everything larger than 0% shows an increase in prices over the year.
Slide9Price Index
Producer Price Index
Index that measures price changes paid by domestic producers for their inputs.
This index tracks changes in prices received by domestic producers of about 3,000 commodities.
Its base year is 1982.
Slide10Price Index
Implicit GDP Price Deflator
Index of average level of prices for all goods and services in the economy, computed quarterly
has a base year of 1992.
It is used to show how consumer prices change over al long time.
Slide11Nominal and Real GDP
What is the difference between nominal and real measurements?
The main difference between nominal and real values is that real values are adjusted for inflation and price changes, while nominal values do not account for outside factors.
Slide12Nominal and Real GDP
Define nominal GDP and real GDP.
Nominal GDP
: Gross domestic product measured using prices that were current at the time of measurement.
Real GDP
: Gross domestic product measured using constant prices . GDP in all years is calculated on the basis of prices in a base year
.
Slide13Nominal and Real GDP
Compare the two tables. Discuss observations you made about the nominal GDP and real GDP.
Year
Nominal GDP
(Billions
of Dollars)
2012
16,155.3
201316,691.5201417,427.6201518,120.7201618,624.5
Year
Real GDP
(Billions
of Dollars)
2012
15,354.6
2013
15,612.2
2014
16,013.3
2015
16,471.5
2016
16,716.2
Slide14Nominal and Real GDP
Compare the two tables. Discuss observations you made about the nominal GDP and real GDP.
**Nominal GDP appears to be higher than real GDP
Year
Nominal GDP
(Billions
of Dollars)
2012
16,155.3201316,691.5201417,427.6201518,120.7201618,624.5
Year
Real GDP
(Billions
of Dollars)
2012
15,354.6
2013
15,612.2
2014
16,013.3
2015
16,471.5
2016
16,716.2
Slide15Types of Inflation
Demand-Pull Inflation
Demand-pull inflation occurs because of increasing demand. As demand increases, prices increase. Occurs when economic conditions are strong.
Example: Consumers have more funds available to buy new cars. Dealers raise prices to match demand. Demand increases for goods needed to make cars. The prices of these goods increase.
Causes:
A growing economy
Government spending
More money in the system
Slide16Cost-Push Inflation
Caused by increased production costs.
Companies raise prices to pass on these costs to consumers. Rising prices cause inflation over time.
Rising gas prices increase transportation costs. Companies have to pay more to transport goods. Consumers then pay higher prices for goods.
Causes:
Natural disasters
Worker Strikes
Sudden change in government
Changes in laws and regulations
Slide17Hyperinflation
Occurs when prices rises extremely quickly.
Money can become worthless.
The printing of more money results in even faster inflation.
Example:
Money and bonds are printed to pay for a war. The value of the currency decreases. A decrease in production causes a shortage of goods. Prices increase rapidly. Money becomes worthless.
Causes:
Economic depression
WarsExtreme government imposed price and wage controls
Slide18Causes of Inflation
Demand-Pull Theory
All parts of the economy try to buy more goods and services than can be produced. Greater demand pulls prices up.
Slide19Causes of Inflation
Cost-Push Theory
Increase in input costs drive up cost of products for producers which eventually leads to an increase in prices.
Slide20Causes of Inflation
Government Deficit
Result of demand from government Deficit spending.
Government spends more money than it takes in.
Basically, a demand-pull with the government as the main cause.
Slide21Causes of Inflation
Wage-Price Spiral
Rising wages and prices force each other to keep going up.
Workers demand higher wages when prices rise.
Producers raise prices to make up for the increased spending on wages.
Slide22Causes of Inflation
Excess Supply of Money
People spend the money when the money supply grows faster than real GDP.
Extra spending creates greater demand.
Demand pushes up prices.
Slide23Consequences of Inflation
The Dollar Buys Less
Prices of goods increases
consumers are able to purchase less for their money.
Slide24Consequences of Inflation
Spending Habits Change
Interest rates are adjusted to account for inflation.
People have trouble borrowing money for large items such as houses and automobiles when interest rates increase.
Slide25Consequences of Inflation
Risky Investments
Some investors choose to invest in things like gold, gems, and artwork whose values are expected to rises as prices rise in hopes that the prices of those items rise at higher rates than inflation rates.
Slide26Consequences of Inflation
Income Distribution Changes
Inflation helps people who owe money because they can repay loans with inflated dollars.
These dollars have less purchasing power than the dollars originally borrowed.
Slide27Stagflation
A combination of stagnant economic growth and inflation.
Occurs when an economy is experiencing:
a damaging rate of inflation
a low level of production of goods and services
a high level of unemployment
Slide28Stagflation
Dangers of Stagflation
Stagflation causes people to worry about becoming unemployed, causing less spending.
It causes worry about inflation, causing less spending.
People spend less money, causing an economic slowdown.
Slide29Stagflation
Effects of Stagflation.
Stagflation can cause a reduction in the value of currency.
Production and GDP may decrease.
Trade with other economies may decrease.