3.2 unemployment [D] Flashcards
What is Inflation ?
Inflation is a persistently rising price level.
when the price level rises rapidly the inflation rate is high.
What is Disinflation ?
Disinflation is a reduction in the rate of inflation.
the price level is rises more slowly so inflation rate is low.
What is Deflation ?
Deflation = a persistently falling price level .
occurs when the inflation rate is negative.
How do we Measure the Price Level ?
A ] Measure the inflation rate or the deflation rate.
B ] Distinguish between money values and real values of economic variables. such as loans and savings.
Why Inflation and Deflation are Problems ?
True or False or Both
Why inflation and deflation are problems ?
- When there steady there not a problem.
- Unpredictable inflation or deflation are problems because they :
1. Redistribute Income.
2. Redistribute Wealth
3. Lower Real GDP and Employment
4. Diverts Resources from Production
Why Inflation and Deflation are Problems ?
- Redistribute Income
- Redistribute :
- Workers and employers often have contracts that last for a year or more.
- An unexpected increase in inflation raises prices but doesn’t immediately raise wages.
- Unexpected deflation has the opposite effect.
Why Inflation and Deflation are Problems ?
- Redistribute Wealth.
- Redistribute Wealth :
- People enter into loan contracts which an agreed intrest rate as a % of the money lent and borrowed.
- Unexpected inflation, the money repaid by the borrower to the lender buys less than the money that was originally loaned.
- Unexpected deflation the money that the borrower repays to the lender buys more that the money originally loaned and the lender benefits.
Why Inflation and Deflation are Problems ?
- Lower Real GDP and Employment.
- Lower Real GDP and Employment :
- Unexpected inflation that increases firm’s profits may cause and increase in investment and a rise in output and employment.
- Unexpected deflation has even worse consequences for output and employment.
Why Inflation and Deflation are Problems ?
- Diverts Resources from Production.
- Diverts Resources from Production :
- Unpredictable inflation or deflation creates economic uncertainty an diverts resources from productive activates to forecasting inflation.
What is Hyperinflation ?
Hyperinflation = an inflation rate 50 per cent a month or higher that grinds the economy to a halt and society to a collapse.
What is Measuring Inflation ?
Measuring Inflation :
- Inflation refers to the rate of change of the aggregate price level.
- The inflation rate is the % change in the price level from one period to the next.
What’s the Consumer Price Index ?
The consumer price index [ CPI ] is a measure of the overall cost of a fixed basket of the g/s bought by a typical consumer.
How the CPI is calculated ?
- Fix the Basket.
- Find the Price
- Compute the Baskets Cost
- Choose a Base Year and Compute the Index
- Compute the inflation rate
How the CPI is calculated ?
- Fix the Basket
- Fix the Basket :
- Determine the price over 5 years.
-
How the CPI is calculated ?
- Find the Price.
- Find the Price :
- find the price of each of the g/s in the basket for each point in time.
How the CPI is calculated ?
- Compute the Basket’s Cost.
- Compute the Basket Cost :
- Uses the data on prices to calculate the cost of the basket of g/s at different times.
How the CPI is calculated ?
- Choose a Base Year and Compute the Index.
- Choose a Base Year and Compute the Index :
- designate one year as the base year, making it the benchmark against which other years are compared.
Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100.
Hoe the CPI is Calculated ?
- Compute the Inflation Rate.
- Compute the Inflation Rate :
- The inflation rate is the % change in the price index from the preceding period.
Formula : The Inflation rate
pie t = [ ( CPIt - CPIt-1 ) over CPIt-1 ] x100
CPI = cost of basket of goods in year t prices over cost of basket of good base year prices x100
What is Laspeyres ?
+ Formula
Laspeyres :
- The CPI measures in index form the monthly changes in the cost of purchasing a fixed representative ‘basket’ of consumer g/s = Laspeyres formula.
Formula
Laspeyres inflation index = E Pi1Qi0 over E Pi1Qi0
What are the Problems in measuring the cost of living ?
A ] Substitution bias
B ] New goods bias
C ] Quality change bias
The Problems in measuring the cost of living ?
A ] Substitution Bias
+ Formula = The Paasche Index
A ] Substitution Bias :
- The basket does not change to reflect consumer reaction to changes in relative prices.
- To overcome the problem of overstatement arising from the fixed basket the Paasche index which uses current year rather than base year weights could be calculated.
Formula :
The Paasche Index = E Qi1Pi0 over E Qi1Pi0
0 = previous period, 1= current period.
The Problems in measuring the cost of living ?
B ] New Goods Bias
B ] New Goods Bias
- The fixed basket does not reflect the change in purchasing power brought on by the introduction of new products.
The Problems in measuring the cost of living ?
C ] Quality Change Bias
C ] Quality Change Bias
- if the quality of a good improves from one year to the next, the value of a euro spent on the good rises.
- if the quality of a good falls from one year to the next, the value of a euro spent on the good falls.
