4. INFLATION:
Inflation does not mean that all prices rise the same amount.
• It does mean that pressure for price increases reaches across
most markets, not only one.
5. INFLATION:
Unlike the price changes we saw with the supply & demand models, price
changes due to inflation are not a one time event. If inflation happened for
one year and then stopped, it wouldn't be called inflation any more.
6. INFLATION RATE:
The rate at which the general level of prices for goods and services is
rising, and, subsequently, purchasing power is falling.
7.
8. BASKET OF GOODS & SERVICES:
•To calculate the inflation rate, economists
look at a "basket of goods and services."
This is a hypothetical group of different
items, with specified quantities of each one,
used as a basis for calculation how price
level changes over time.
9. BASKET OF
GOODS &
SERVICES:
• When conceptualizing a basket of
goods, it is best to imagine a
shopping basket. The basket
contains everyday products such as
food, clothing, furniture and financial
services. As the products in the
basket increase or decrease in price,
the overall value of the basket
changes. The value of the basket
each year determines the inflation
rate for that period.
10.
11. CONSUMER PRICE INDEX (CPI):
The "basket of goods and
services" is used to calculate
a consumer price index. CPI
shows us how expensive
goods and services are in a
selected area.
Observing change in the CPI
is the most common way to
generate an inflation rate.
12.
13. CONSUMER PRICE INDEX (CPI):
Make a list of 5 cities you think you might like to live in.
Compare CPI in the cities you selected. A higher CPI
number indicates that goods and services cost more in
that location.
14. Inflation is harmful because as inflation rates go up, the purchasing power of our money
goes down.This means consumers can buy less with their money than they could in the
past.
15. But inflationis also good because a
small amount of inflation is a sign
that the economy is growing.
Typically, growing
nations try to maintain
a steady inflation rate
of 2% per year.
16. A COMMON PROBLEM IS...
..when wages don't rise at the same rate inflation is rising at.
17. Normally, in locations with expensive goods,
average wages of employees are high enough to
purchase those goods. For example, a doctor in
Tokyo (an expensive city) will have a higher wage
than a doctor in Sarajevo (my tiny hometown).
18. DEFLATION
A decrease in the
general price level of
goods and services.
Deflation occurs
when the inflation
rate falls below 0% (a
negative inflation
rate).
19. DEFLATION
• To an Economist,
Deflation is worse
than Inflation (as long
as that Inflation isn't
too high!). Deflation
causes falling profits,
closing factories,
shrinking employment
and incomes, and
increasing defaults on
loans by companies
and individuals.
23. IN GERMANY, 1922, A PERIOD
OF SEVERE HYPERINFLATION
BEGAN.THERE WERE A FEW
CAUSES: NAMELY,THE
GERMAN GOVERNMENT HAD
PRINTED AN EXCESSIVE
AMOUNT OF NEW BILLS, AND
REPARATIONS PLACED ON
GERMANY AFTER LOSING WWI
CAUSEDTHE GERMAN
CURRENCYTO LOSE ITSVALUE
AGAINST OTHER CURRENCIES.
24. IN ZIMBABWE, 2008,THERE
WAS A LAND-REFORM POLICY
THATTOOK PROPERTY FROM
WHITE LANDOWNERSTO
REDISTRIBUTETOTHE PUBLIC.
THE GOVERNMENT
INSTABILITYTHAT FOLLOWED
CAUSED PEOPLETO LOSE
FAITH INTHEVALUE OFTHE
CURRENCY, AND RAPID
INFLATIONTOOK PLACE.
