Download 6.02 Understand economic indicators to recognize economic trends

6.00 Understand economics trends and
communication.
6.02 Understand economic indicators to
recognize economic trends and conditions.
6.02-A Describe the economic impact of
inflation on business.
5-170 5-171 6.02-A Define
 Inflation: A persistent increase in the average price level in
the economy.
 Inflation Rate: The percentage change in the price level from
one period to the next.
 Deflation: A persistent decrease in the average price level in
the economy.
 Consumer Price Index: An index of prices of goods and
services typically purchased by urban consumers.
 Standard of Living: The amount of goods and services that a
nation’s people have
 Targeted Inflation Rate: An acceptable rate of increase that
the country attempts to control
 Price Stability: The condition in which the average price level
in the economy changes very slowly, if at all.
Inflation
• Describe causes of inflation.
– Inflation results when the economy has too much demand
for available production.
– The two causes of inflation:
• Demand-pull inflation results when economy-wide
shortages are created by increases in aggregate demand.
• Cost-push inflation results when an economy-wide
shortages are created by decreases in aggregate supply,
which are so named because they are more often than
not triggered by increases in production cost.
Inflation
 Explain how inflation impacts the economy.
◦ Makes products more expense, shifting how
consumers will spend
 Describe the relationship between price
stability and inflation.
◦ Price stability means that inflation rates will be low
 Explain problems associated with deflation.
◦ Manufacturers will be earning smaller profits or
losing money as deflation occurs
Deflation
• Explain problems associated with deflation.
– Deflation can haphazardly redistribute income and
wealth. If some prices decrease more than others,
then income and wealth is redistributed to the
owners of those resources with the smaller price
decreases.
– Deflation creates uncertainty. If prices
unexpectedly decline, then consumers and
producers alike might be less willing to pursue
long-term activities, because they just do not
know what will happen to the price level.
Inflation
• Discuss reasons why the inflation rate should
be above zero.
– Indicates that demand is growing
• Explain how businesses can use the Consumer
Price Index.
– It provides timely information for consumers,
businesses, and government leaders who make
decisions that are sensitive to inflation.
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CPI
 Discuss the purpose of the Consumer Price Index
(CPI).
◦ The CPI is commonly used as: (1) an indicator of the
price level and economic activity, (2) a method of
converting nominal economic indicators to real terms,
and (3) a means of adjusting wage and income
payments for inflation.
 Describe how the Consumer Price Index is
determined.
◦ an index of prices of goods and services typically
purchased by urban consumers. This index, compiled
and published monthly by the Bureau of Labor
Statistics, provides a relatively accurate indication of
the average price level in the economy, and thus
inflation.
CPI
total expenditures on
market basket in current period
• CPI = total expenditures on
market basket in base period
x 100
CPI
• Identify the major kinds of consumer spending
that make up the Consumer Price Index.
– measures goods typically purchased by urban
consumers
5-170 5-171
 Explain how the Consumer Price Index is used to
find the rate of inflation.
◦ CPI measures the prices of a fixed market basket of
goods
◦ If their price is going up, inflation is occurring
 Describe limitations on the use of the Consumer
Price Index.
◦ CPI excludes goods purchased by rural consumers. It
also excludes capital goods purchased by the business
sector and the whole myriad of purchases made only
by the government and foreign sectors.
◦ Measures about 60% of the economy and misses 40%