Price indices and Inflation & cost of Inflation Flashcards
What is the goal with regards to inflaton
keep prices stable, not increase inflation
Who and how is inflation measured
- the gov tracks the prices of specific market baskets
- market baskets include he same goods and services
- Gov. tracks the change in the basket price over time
What are the two ways to look at inflation
- The inflation rate
- Price indices or index
What is the inflation rate
the % change in prices over a specific time period
What is priceindices or index
index numbers assigned to each year that show how prices have changed relative to a specific base year
- not a %
- each base year is given an index of 100
- each year is given an index # as well
What is the most commonly used measurement of inflation
price indices or index
What is an important note about inflation, is it ok for prices to go up over time?
prices can go up over time, we just don’e want spikes in inflation or even lower prices or deflation
What is the formula for CPI
CPI = (price of market basket) / Price of market basket in base year) x 100
What is disinflation
when prices go up, just not as fast
what is inflation
prices are going up
what is deflation
prices are going down
Ex. Liam was paid $500 by the gov for unemployment benefits. Does it count toward GDP?
no, b/c it’s a transfer payment
ex. Harry lives in Quebec but paid $35 k for out of province tuition. Does it count toward GDP?
yes, education is a service
ex. Joe’s recording studio paid $50k for new musical instruments. Does it count toward GDP?
yes, but it’s investment not consumer spending
Ex. Larry purchased $10k worth of gov. treasury bills. Does it count toward GDP?
no, its a non-production. nothing was created
ex. Neil purchased a new roof for 3 million home he purchased 5 years ago Does it count toward GDP?
yes, considered investment
Practice Question:
# of people Full time workers 150 Part-time workers 20 unemployed 30 Discouraged workers 50 # of children 50
--------- Total population 300
How many workers are in the labour force
150 + 20 + 30 = 200
Practice Question:
# of people Full time workers 150 Part-time workers 20 unemployed 30 Discouraged workers 50
--------- Total population 300
Calculate the labour force participation rate:
What is the unemployment rate
200 / 250 = 80%
Add details where the numbers came from
in labour force = 200 / (# in labour force + discouraged workers?) 250
30 / 200 = 15%
What type of employment do we have when the economy is inside the demand curve
all 3 unemployments are involved
What type of employment do we have when the economy is on the demand curve
Frictional and structural = at fully employment
What type of employment do we have when the economy is outside the demand curve
Economy can produce beyond full employment with very little structural and frictional unemployment
- not really possible, not the goal
If you have an economy outside the demand curve what can you say about employment and inflation
- beyond full employment, will cause higher inflation eventually
What happens when you pay people when they are unemployed
increases frictional unemployment as people take longer to find jobs
What is the issue with CPI
sometimes it over or under estimates what’s going on
What is substitution Bias
when CPI falls to account for consumers switching to cheaper alternatives as prices change
What does substitution Bias lead to
leads to overestimation of the cost of living
Ex. Price of beef goes up
- many assume people are still buying beef at the higher price but they switched to chicken
What the problems with unintended inflation (who is helped and hurt by unintended inflation)
People hurt by it:
Hurt:
1. lenders that lend at a fixed interest rate
2. people with fixed incomes like retirees - erodes their purchasing power
What the problems with unintended inflation (who is helped and hurt by unintended inflation)
People who benefit by it:
Benefit:
1. borrowers that borrow at a fixed interest rate
- you are paying back those dollars with a lower purchasing power
