Download Life under high rates of inflation Inflation and Income inequality

Northwestern Project
Classes 1,2 and 3
Life under high rates of inflation
Inflation and Income inequality
Inflation Targeting in Developing Economies
Rubens Penha Cysne
November, 2009
Key Concepts*
Index number - An average that measures change over time of such
variables as the price level and industrial 'production.
Inflation - A rise in the average level of all prices.
Inflation tax - The revenue the government raises by creating money
(Steady State Definition).
Economic Inequality – A measure of concentration of income or wealth
among economic agents in an economy
Inflation accounting - A method of reporting that allows for the financial
effects of changes in the price level.
*From Different Public Sources
Inflation adjustment - Whenever any figure has an adjustment
made for inflation or deflation.
GDP Deflator. A price index indicating the prices of all currently
produced goods and services.
Interest - 1. the payment for current rather than future command
over resources; the cost of obtaining credit. Or 2. the payment
for the use of borrowed money. Or 3. the return paid to owners
of capital.
Interest rate - The rate charged on money borrowed or lent.
Real Interest Rate: Interest Rate Adjusted for Inflation
Nominal Values – Values that have not had the effects of
inflation taken into account.
Real Values – Values that have had the effects of inflation taken
into account
Nominal exchange rate - The rate (price) at which a person can
trade the currency of one country for the currency of another.
Real Exchange Rate – Nominal Exchange Rate Adjusted for
Inflation
Nominal GNP - The output off all goods and services valued at
current prices.
Real GNP – Nominal GNP adjusted for Inflation
Welfare Costs of Inflation - The economic losses due to Inflation.
Shoe leather costs of inflation. Time loss of money holders, for
example by making trips to the bank.
Menu costs of inflation. Time and effort lost due to price-list changes as
a result of inflation
Compounding - The process of adding interest each year to an initial
capital sum.
Compound interest - Apply interest on the capital plus all interest
accrued to date.
Indexation. The adjustment of nominal values for inflation, for example by
means of cost-of-living adjustment clauses in labor contracts.
Related Questions:
Explain and exemplify the use of each one of the concepts above.
Describe the way how real interest rates and real exchange rates
are calculated. Provide some numerical examples in both
cases.
Why is it important to adjust nominal variables for inflation? Give
some examples.
Explain in words why inflation may cause losses to an economy.
What would you have to say about deflation?
Explain the concept of economic inequality.
Downloadable Papers and Recommended Web Sites
Paper 1 - Inflation and Inflation Tax in US and Mercosul (Only the
Data)
Paper 2 – Inflation and Income Inequality (Only the Conclusion)
Paper 3 – Additional Definitions Related to Cosf of Living (Tom
McGahagan)
Recommended Web Site:
American Economic Association: http://rfe.org/index.php
Inflation in Brazil: Target and Realized
Margem de Meta
14%
Meta
IPC FIPE
12%
IPC FGV
IPCA IBGE
10%
8%
6%
4%
2%
0%
1999
2000
2001
2002
2003
2003* 2004
Fonte: Banco Central do Brasil. * Metas reajustadas.
2004* 2005
2006
2007
2008
2009
Inflation and Exchange Rate (Dollar Price in
R$)
14%
Margem da Meta
4
Meta
3,5
IPCA IBGE
12%
Câmbio (RS$/US$)
Inflação
2,5
8%
2
6%
1,5
4%
1
2%
0,5
0%
0
1999
2000
2001
2002
2003
2003*
2004
Ano
Fonte: Banco Central do Brasil. * Metas reajustadas.
2004*
2005
2006
2007
2008
2009
Preço do Dólar
3
10%