Download Inflation

Inflation
Frederick
University
2014
Definition
A process of irreversible increase in the
overall price level, involving a change in
relative prices
Typology
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According to the form – open and hidden
According to the rate of price growth –
moderate, galloping, hyperinflation
According to expectations anticipated and
unanticipated
According to source – driven by MS or MD, by
AS
Demand pull inflation
CPI
AD
AD’
Y
Supply push inflation
CPI
AD
AS’
AS
stagflation
Y
Measurement


GDP deflator
Consumer Price Index (CPI)
GDP deflator
Nominal GDP – GDP at current prices
 Real GDP – GDP at constant prices
(base year prices – chosen year)
 Index – the change in the value of an
indicator compared to its previous level,
taken as a base (= 100)
 GDP deflator =
(Nominal GDP : Real GDP) х 100
GDP deflator is a current year weighted
index

Consumer Price Index


Consumer basket
Relative shares of goods in the
consumer basket - g

CPI = [(P1A/ P0A)x g0A + (P1B/P0B)x g0B] x 100
Rate of inflation = [(CPI – 100)/100]x 100%

CPI is a base year weighted index

CPI an example
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There are two goods in the
economy – movies and wine
Р of movies in 2010 г. = €5.
Р of wine in 2010 г. = €4.
Q of movies in 2010 г. =
400
Q of wine in 2010 г. = 2000
The cost of consumer basket
= 400 x € 5 + 2000 x €4 =
=€ 10000
€ 2000 out of these €10000
were spent on movies. This
makes 20% or 0.2 of all
money spent on movies.
Thus, the relative weight
(g) of movies in 2010 =
0.20

g of wine = 0.80

Р of movies in 2011 = €8

Р of wine in 2011 = €3

CPI = [(8/5) х 0.20 + (3/ 4)
x 0.80) x 100 = 93

Rate of inflation =
= (93 -100)/100 x 100% =
= -7%
If the CPI were above 100, the
rate of inflation would have
been positive.

The Phillips curve
Rate of
inflation
LRPC
Z’
W’
SRPC’
Z
W
U*
SRPC1
V
U
U’