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Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
Inflation
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Inflation

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  • 1. Inflation
  • 2. General terms  DEFLATION = opposite to inflation, occurs when the general level of prices is falling  DISINFLATION = describe the process of reducing a nation’s rate of inflation  STAGFLATION = high inflation in periods of high unemployment  REVALFLATION = impact of inflation, where the result is an inner valorisation of exchange rate  Rate of inflation ( ) ( ) ( ) ( )1 1 − −− = tyear tyeartyear tyear levelprice levelpricelevelprice i
  • 3. PRICE INDEXES • Consumer price index (CPI) - each item is assigned a fixed weight proportional to its relative importance in consumer expenditure budget • Producer price index (PPI) - measures the level of prices at the wholesale or producer stage • GDP deflator – the ratio of nominal GDP to real GDP  can be interpreted as a comprehensive price index 100 00 10 ∗= ∑ ∑ PQ PQ CPI 100 01 11 ∗= ∑ ∑ PQ PQ deflatorGDP
  • 4. Numerical Example  Calculate the consumer price index and the rate of inflation for 2006. Base year (2000) Weigh (%) Price 2006 Weigh(%) Price Food 20 100 20 102 Shelter 50 100 50 106 Medical care 30 100 30 110
  • 5. Categories of Inflation according to its pace/rate:  MODERATE INFLATION – occurs when prices are rising slowly (we might classify this as single-digit annual inflation rates 0-10 % per year)  GALLOPING INFLATION - occurs when prices start rising at double-or-triple digit rates (20, 100 % a year)  HYPERINFLATION – the extraordinary price increase (at annual rate of 100 % or more prevailing in a nation for at least one year)
  • 6. Inflation according to: a) its impact on individual commodity:  Balanced – leaves relative prices unchanged all prices are rising at the same percentage point each year it doesn’t cause a change in consumption structure  Unbalanced – some prices are increasing faster than the general price level there can be seen an expressive impact on the demand and consumption structure  b) predictability  Anticipated  Unanticipated  Inertial inflation = tends to stay at its prior rate until shocked by economic events.
  • 7. IMPACT OF INFLATION „cost of inflation“ 1) Redistribution of income and wealth 2) Social impacts 3) Impact on balance of economy
  • 8. SUMMARY OF IMPACTS  there is no effect on real output, efficiency, or income distribution of an inflation that is both balanced and anticipated  generally, the economic impact of an unanticipated moderate inflation is mainly on the distribution of income and wealth, and less on the efficiency of the system  the mildest impact will be found when inflation is at a low rate – small, anticipated and balanced  major social and economic impacts arise for galloping inflation or hyperinflation
  • 9. Causes of Inflations 1.DEMAND-PULL INFLATION - the essence of demand- pull inflation is too much spending beating against a limited supply 2. COST-PUSH INFLATION - first appeared during the 1930’s and the 1940’s - inflation caused by continual decrease in aggregate supply
  • 10. THE PHILLIPS CURVE  the Phillips curve depicts the relationship between unemployment and inflation, both in percent SHORT-RUN PHILLIPS CURVE  a nation could buy a lower level of unemployment if it were willing to pay the price of a higher rate of inflation
  • 11. The shifting Phillips curve „Boom cycle“  Period 1: unemployment is at the natural rate; no demand or supply surprises; economy is on the lower short-run Phillips curve  Period 2: rapid increase in output during an economic expansion (f. e. as a result of expansion policy) lowers the unemployment rate wages and prices begin to accelerate the economy moves up and to the left along the short run PC  Period 3: Firms and workers begin to expect higher inflation  higher expected rate of inflation gets incorporated into wage and price decisionsthe short-run PC shifts upward  Period 4: unemployment rate returns to the natural rate; contraction in economic activity brings output back to its potential.
  • 12. The vertical Long-Run Phillips curve  When the unemployment rate diverges from the NRU the inflation tends to change  According to the natural rate theory, the only level of unemployment consistent with a stable inflation rate is the natural rate of unemployment the long-run PC is a vertical line rising straight up at the NRU
  • 13. Two important implications for economic policy:  1) there is a minimum level of unemployment that an economy can sustain in the long run; 2) the nation can temporarily enjoy low rate of unemployment, but at the expense of rising inflation WAYS (COSTS) OF DISINFLATION:  Temporary increase in unemployment above the NRU  Income policies (wage- price control or voluntary guidelines)
  • 14. 1. Calculate the CPI and IPD, if following amount of products was consumed in economy: Product 1.Year 2. Year Price Quantity Price Quantity A 16 120 000 21 142 000 B 820 31 000 815 33 100 C 3 600 290 4 050 270

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