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Inflation – Macroecon - Unit 2
Which car costs more?
Inflation is a general increase in prices.
When thinking about inflation though, you
need to keep in mind ….
prices were
…. In the good old days ________
much lower, but _________
were much
wages
lower also.
To compare costs over time we look
at purchasing power – the ability to
purchase goods and services.
4,696
guess
3rd
1,638
guess
2nd
1,240
guess
1st
To determine which car costs more we look at
how many hours you would have to work to earn
the money to buy the car.
Who has more purchasing power with her salary?
Full-time student
minimum wage
2.25
1982 = $_____/hr
Full-time student
minimum wage
6.90
2008 = $_____/hr
http://www.measuringworth.co
m/calculators/ppowerus/
$2.25/hr has the
same purchase
power as
4.83
$______/hr
in 2007
Anticipate ... for which teen are these things cheaper?
$ 3.37 $1.59
$ 2.53
$ 1.19
$ 5.84
$ 2.75
$ 116.51 $ 54.90
$ 1,167.17
$ 550.00
http://www.thepeoplehistory.com/
$ 2.69
$ 2.79
$ 9.50
$ 89.90
$ 75.00
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http://www.westegg.com/inflation/
To measure inflation economists study the price
level – the cost of goods & services in an
economy at any given point in time.
We determine what the price level
was by creating a price index – a
measurement that shows how the
average price of a standard group of
goods changes over time.
The best-known index is the CPI –
Consumer Price Index published
monthly.
Each month BLS workers look at the
prices of a representative basket of
_______
goods and services that most
American families buy to see if prices
increased or __________.
have __________
decreased
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What’s in our market basket?
6.2%
medical care
5.6% recreation
42.4%
housing
education & 6.1%
other 3.2%
communication
tobacco & personal
care products
3.7% apparel
food 14.9%
transportation 17.6%
Guess which category we spend the
most on and its percentage weight.
Data from Sep. 2008, www.bls.gov/cpi/cpid0809.pdf
How do we calculate the CPI?
1st – BLS picks a base year (currently 1984)
and assigns it an index of 100
2nd – BLS looks at what the market basket
of goods costs in the new year divided by
the cost in the base year.
updated cost
CPI =
x 100
base period cost
CPI for
2008
$
440
=
$ 220
x 100
200
_____
=
We then use the CPI INDEX to calculate
inflation:
Inflation
Rate for
2008
CPI for 2008
=
-- CPI for 2007 x 100
CPI for 2007
You’re trying to get at ...
what percent higher are
prices this year?
Inflation
Rate for
2004
188.9
(CPI for 2004)
=
--
184.0
(CPI for 2003)
184.0
(CPI for 2003)
x 100
2.7
_____%
=
Inflation
between
1% – 3%
doesn’t cause
problems.
Inflation
> 5%
can cause
problems
2008 inflation rate = 4%– 5%
CPI Weighing
website showing actual contents of market basket
Potential problems with the CPI
Consumers’ preferences change
 Huge variations in prices in different
cities
 Substitution bias – if one thing gets more
expensive, then consumers will.....
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Which President earned more in real money?
Which deserved more?
Presidential Pay in Current and Constant Dollars
http://www.presidentsusa.net/
http://oregonstate.edu/cla/polisci/faculty-research/sahr/sumprpay.pdf
A. Causes of Inflation
[1] demand-pull inflation – excessive
demand, if demand is growing faster
than the level of production, prices will
increase.
[2] cost push inflation – firms’ costs
rise; wage increases, gov’t taxes,
exchange rates needed for purchasing
materials abroad.
wage-price spiral =
an example of cost-push inflation
A. Causes of Inflation
[3] money supply increases – with more
money floating in the economy people
will pay more for goods
B. Costs of Inflation
(1) redistributes income – from people
who cannot raise prices to those people
who do; arbitrary; affects people on
fixed income like a pension
(2) information skewed – prices
change but so does income; hard to
know what is relatively a good price or
not
B. Costs of Inflation
(3) competitiveness – if one country’s
prices increasing but other country’s
prices not, then will impact sales
(4) uncertainty – if inflation is varying
firms reluctant to invest in new plant
and equipment; people reluctant to
spend
C. 2 Types of Inflation
Anticipated Inflation – people have built
expected inflation into their economic
decisions.
Unanticipated Inflation – not foreseen;
but while some are hurt by
unanticipated inflation, others may
benefit
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Wells Fargo Bank extends a $50,000 loan
to the owner of El Zócalo to put in new
kitchen equipment. The loan is to be repaid
over the next 10 years.
Unanticipated Inflation takes off at 10%.
Wells Fargo
hurt
or
made gains or unaffected
El Zócalo
hurt
or
made gains or unaffected
D. Phillips Curve
Phillips Curve shows trade off between
unemployment & inflation
Inflation
Phillips Curve
Unemployment
Based on the curve above, reducing
increase
unemployment will likely __________
inflation.
AP workbook p. 75 & 76, Activity 13
AP workbook p. 81, Act. 15
numbers 1-5 only
work with a small group 15 min
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Website with fun activities to do with
inflation
Go Back in Time
http://qrc.depaul.edu/djabon/cpi.htm
Let’s look at purchasing
power of salary.
Guess:
Teacher -- Starting Salary, 4-year
degree, NC, 1993
Teacher -- Starting Salary, 4-year
degree, Chandler, 2007
$19,000
$34,000
Who has more purchasing power with her
salary? teacher in 1993 or 2007?
$ 19,000 in 1993 would buy the same as
$ 26,944 in 2007
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