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# Inflation

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### Transcript

• 1. Inflation
• 2. General terms &#xF06E; DEFLATION = opposite to inflation, occurs when the general level of prices is falling &#xF06E; DISINFLATION = describe the process of reducing a nation&#x2019;s rate of inflation &#xF06E; STAGFLATION = high inflation in periods of high unemployment &#xF06E; REVALFLATION = impact of inflation, where the result is an inner valorisation of exchange rate &#xF06E; Rate of inflation ( ) ( ) ( ) ( )1 1 &#x2212; &#x2212;&#x2212; = tyear tyeartyear tyear levelprice levelpricelevelprice i
• 3. PRICE INDEXES &#x2022; Consumer price index (CPI) - each item is assigned a fixed weight proportional to its relative importance in consumer expenditure budget &#x2022; Producer price index (PPI) - measures the level of prices at the wholesale or producer stage &#x2022; GDP deflator &#x2013; the ratio of nominal GDP to real GDP &#xF0E8; can be interpreted as a comprehensive price index 100 00 10 &#x2217;= &#x2211; &#x2211; PQ PQ CPI 100 01 11 &#x2217;= &#x2211; &#x2211; PQ PQ deflatorGDP
• 4. Numerical Example &#xF06E; 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: &#xF06E; MODERATE INFLATION &#x2013; occurs when prices are rising slowly (we might classify this as single-digit annual inflation rates &#xF0E8;0-10 % per year) &#xF06E; GALLOPING INFLATION - occurs when prices start rising at double-or-triple digit rates (20, 100 % a year) &#xF06E; HYPERINFLATION &#x2013; 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: &#xF06E; Balanced &#x2013; leaves relative prices unchanged &#xF0E8;all prices are rising at the same percentage point each year &#xF0E8;it doesn&#x2019;t cause a change in consumption structure &#xF06E; Unbalanced &#x2013; some prices are increasing faster than the general price level &#xF0E8;there can be seen an expressive impact on the demand and consumption structure &#xF06E; b) predictability &#xF06E; Anticipated &#xF06E; Unanticipated &#xF06E; Inertial inflation = tends to stay at its prior rate until shocked by economic events.
• 7. IMPACT OF INFLATION &#x201E;cost of inflation&#x201C; 1) Redistribution of income and wealth 2) Social impacts 3) Impact on balance of economy
• 8. SUMMARY OF IMPACTS &#xF06E; &#xF0E8;there is no effect on real output, efficiency, or income distribution of an inflation that is both balanced and anticipated &#xF06E; &#xF0E8;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 &#xF06E; &#xF0E8;the mildest impact will be found when inflation is at a low rate &#x2013; small, anticipated and balanced &#xF06E; &#xF0E8;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&#x2019;s and the 1940&#x2019;s - inflation caused by continual decrease in aggregate supply
• 10. THE PHILLIPS CURVE &#xF06E; the Phillips curve depicts the relationship between unemployment and inflation, both in percent SHORT-RUN PHILLIPS CURVE &#xF06E; 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 &#x201E;Boom cycle&#x201C; &#xF06E; Period 1: unemployment is at the natural rate; no demand or supply surprises; economy is on the lower short-run Phillips curve &#xF06E; Period 2: rapid increase in output during an economic expansion (f. e. as a result of expansion policy) lowers the unemployment rate &#xF0E8;wages and prices begin to accelerate &#xF0E8;the economy moves up and to the left along the short run PC &#xF06E; Period 3: Firms and workers begin to expect higher inflation &#xF0E8; higher expected rate of inflation gets incorporated into wage and price decisions&#xF0E8;the short-run PC shifts upward &#xF06E; 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 &#xF06E; When the unemployment rate diverges from the NRU the inflation tends to change &#xF06E; 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: &#xF06E; 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: &#xF06E; Temporary increase in unemployment above the NRU &#xF06E; 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