7. TWO CAUSES OF INFLATION
Demand Pull Inflation - This inflation occurs due to
pressure on prices brought about by excess demand
over supply.
Cost Push Inflation This is a type of inflation where
increased in the expenses incurred in the production will
push prices up.
8. INFLATION LOSSERS:
1. Fixed income earners are affected during inflation. With increased
prices, people who belong to this group would lose out because the
income they receive now would be able to buy less than before.
2. Pensioners from the SSS of the GSIS are also inflation loser
since the amount of the monthly pension that they receive is fixed
and is not adjusted with inflation hike. Would result in a net loss to
the pensioner.
3. Creditors lose out during inflation because the fixed amount of
principal and interest they lent out would now have lesser value
once the money will be returned to them
9. INFLATION GAINERS:
1. Flexible income earner. Business would gain more if prices of
commodities they produce and sell go up. An increase in inflation means
that their income would obviously register a bigger gain since they can
sell their products at a higher price.
2. Speculators are inflation gainers when they perceive that the inflation
rate will increase. They will but goods at cheaper prices and then sell
them later at higher prices because of increase in inflation rate.
3. Debtors are gainer because the value of the money they borrowed before
would now have more value considering the present value of money
before an inflation hike.
4. Borrowers form SSS and GSIS through housing loan, they are gainers
since they have build houses before where prices of all construction
materials were still affordable.
10. MEASUREMENT OF PRICE INCREASE
1. Consumer Price Index. The most used measure of price increase as it reflects
what happens to the living standards of the households. It is intended to
provide a general measure of average monthly and annual changes in the
retail prices of commodities commonly bought by consumers covering all
income.
2. Retail Price Index. This is designed to measure monthly changes of the prices at
which retailers dispose of their goods to consumer and end users.
3. Wholesale Price Index. It measures monthly changes in the general price level
of commodities that flow into wholesale trade intermediaries. It measures the
price changes when wholesaler disposes their goods to the retailers.
4. Stock Price Index. This serves as a measure of the changes in and to trace the
movement of the average prices of company shares of stock traded in the Stock
Exchange
11. 1.__________ The perceptive and lucky individuals who are able
to buy goods at cheaper prices and then sell them later at
higher prices.
2.___________ A condition of general price increases which
reduces the amount of goods and services that money can buy.
3.__________ Refers to the pressure on prices brought about by
excess demand over supply.
4.___________ A measure of price increase which provides a
general measure of average monthly and annual changes in the
retail prices of commodities ought by consumer
5.___________ This pushes prices up when the expenses
incurred in production increases.
12. 6. _______ Inflation losers who lose out because the income they receive at
present would be able to buy less than before.
7. ________ Inflation gainer who fain more if prices of commodities they
produce and sell go up
8. _________ Inflation loser wherein the fixed amount of principal and
interest they lent out would have less value when inflation rate increases.
9. _________ A measurement of price increase which is intended to
provide a general measure of average monthly and annual changes in
the retail prices of commodities commonly bought by consumers
covering all income household.
10. _________ A measurement of price increase which is designed to measure
monthly changes of the prices at which retailers dispose of their goods to
consumers and end users.
13. Table 1. Price Comparisons, 1970 and 2014
Items 1970 2014
Pound of ground beef 33 208
Pound of butter 43 145
Movie ticket 77 300
Sales price of new home (median) 100,000 2,000,000
New car 150,000 1,650,000
Gallon of gasoline 18 200
Average hourly wage for a manufacturing
worker
160 1000
Per capita GDP 9,350 153,000
17. •To get the PRICE LEVEL, Economist
use the concept of Market Basket of
Goods and Services
18. •INDEX NUMBER - measures
changes in the general price level
(or in the value of money) over a
period of time.
Index numbers are based on a value of 100,
which makes it easy to measure percent
changes.
19.
20. 3 steps to get the Inflation rate
Expenses
Index Number
Price Level
Inflation rate
21. Total Expense: 60 + 10 + 30 = 100
Year 1 Amount Price Total
Hamburgers 20 3 60
Aspirin 1 10 10
Movies 5 6 30
22. Total Expense:
Year 2 Amount Price Total
Hamburgers 20 3.2 64
Aspirin 1 10 10
Movies 5 6.5 32.5
23. Total Expense:
Year 3 Amount Price Total
Hamburgers 20 3.1 62
Aspirin 1 10 10
Movies 5 7 35
24. Total Expenses: 70 + 10 + 37.50 = 117.50
Year 4 Amount Price Total
Hamburgers 20 3.5 64
Aspirin 1 10 10
Movies 5 7.5 37.5
25. A College Student’s Basket of Goods
Items Hamburger Aspirin Movies Total Cost of Market
Basket
Qty 20 1 bottle 5 —
Year 1 Price 3 10 6 —
Year 1 Amount Spent 60 10 30 100.00
Year 2 Price 3.20 10 6.50 —
Year 2 Amount Spent 64 10 32.50 106.50
Year 3 Price 3.10 10 7 —
Year 3 Amount Spent 62 10 35 107.00
Year 4 Price 3.50 10 7.50 —
Year 4 Amount Spent 70 10 37.50 117.50
26. Economist use one year as the
BASE YEAR to convert the
money spent on the basket to
PRICE INDEX
27. Calculating Price Indices When Year 3 is the Base Year
Total Spending Price Index
Year 1 100 100 / 1.07 = 93.4
Year 2 106.50 106.50 / 1.07 = 99.5
Year 3 107 107 / 1.07 = 100.0
Year 4 117.50 117 / 1.07 = 109.8
28. FROM PRICE INDEX TO INFLATION RATE
An inflation rate is just the percentage change in a price index.
(Level in New Year) – (Level in previous Year)
Level in Previous Year
= INFLATION RATE
___________________________
29. Calculating the Inflation Rate from the Price index
Price index Inflation Rate
Year 1 93.4
Year 2 99.5 (99.5−93.4) / 93.4 = 0.065 = 6.5%
Year 3 100 (100−99.5) / 99.5 = 0.0047 = 0.47%
Year 4 109.8 (117.50−100) / 100 = 0.098 = 9.8%
30. Suppose that a typical market based in China consists of 200
Avocados and 230 Jackets.
The table below shows data on prices for Avocados and Jackets in
China for three years.
Year Price of Avocados Price of Jackets
2014 1.2 100
2015 1.1 210
2016 1 160
Assume that the base year is 2015.
Given this data, what is the price of the basket in 2014?
31. Suppose that a typical market basket in China consists of 110
Oranges and 270 Textbooks.
The table below shows data on prices for Oranges and Textbooks
in China for three years.
Year Price of Oranges Price of Textbooks
2014 0.6 190
2015 1.2 90
2016 1.3 110
Given this data, what is the Inflation rate in 2015?
32. Suppose that a typical market basket in China
consists of 150 Apples and 220 Bags.
Year Price of Apples Price of Bags
2014 1.9 130
2015 0.9 190
2016 1.4 180
Given this data, what is the Inflation rate in 2016?
33. Suppose that a typical market basket in Canada
consists of 250 Avocados and 290 Bags.
Year Price of Avocados Price of Bags
2014 1.1 200
2015 1.1 200
2016 0.8 150
Given this data, what is the Inflation rate between
2015 and 2016?
