the inflation measurement and adjustment

1. Ss 13 - MACROECONOMICS

2. INFLATION - is an economic indicator
that indicates the rate of rising prices of
goods and services in the economy.
- is a quantitative economic
measure of a rate of change in prices of
selected goods and services over the
period time.

3. 1. Demand-pull Inflation
2. Cost-push Inflation
3. Built-in Inflation

4. THE MAIN CAUSES OF INFLATION:
1. Monetary Policy – it determines the supply of current
in the market.
2. Fiscal Policy – it monitors the borrowing and spending
of the economy.
3. Demand-pull inflation – increase in prices due to the
gap between the demand and supply.
4. Cost-push inflation – higher prices of goods and
services due to increased cost of production.
5. Exchange rates – exposure to foreign markets are
based on the dollar value.

5. How do we prevent inflation?
To prevent inflation, the primary strategy is to
change the monetary policy by adjusting the
interest rates. Higher interest rates decrease
the demand in the economy.This results in
lower economic growth and therefore, lower
inflation.

6. Effects of rise of the inflation rate:
1. A rise in an inflation rate can cause more than a
fall in purchase power.
2. Inflation could lead to economic growth as it can
be a sign of rising demand.
3. Inflation could further lead to an increase in costs
due to workers demand to increase wages to meet
inflation.
4. Domestic products might become less
competitive if inflation within the country is higher.
It can be weaken the currency of the costs.

7. Inflation rate formula
• Consumer prices index (CPI) – a measure of the overall cost of goods
purchased by people living in metropolitan urban areas.
• CPI is used to calculate inflation: an increase in the average level of prices.
• Annual inflation rates: the percentage change in the CPI from its preceding
year.
Inflation rate =
𝐶𝑃𝐼 𝑡ℎ𝑖𝑠 𝑦𝑒𝑎𝑟 −𝐶𝑃𝐼 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟
𝐶𝑃𝐼 𝑙𝑎𝑠𝑡 𝑦𝑒𝑎𝑟
x 100%

8. Example: Basket [10 rice and 20 sugar]
YEAR PRICE OF
RICE
PRICEOF
SUGAR
COST OF
BASKET
2019 40 32 1040
2020 50 60 1700
2021 60 84 2280
1. Calculate the total cost of purchasing the base year
fixed basket [10 rice and 20 sugar] in each year.
For 2019: 10 x 40 + 20 x 32 = 1040
for 2020: 10 x 50 + 20 x 60 = 1700
for 2021: 10 x 60 + 20 x 84 = 2280

9. 2. Construct CPI inflation
𝐶𝑃𝐼 𝑖𝑛 𝑦𝑒𝑎𝑟 𝑥 =
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑌𝑒𝑎𝑟 𝑥
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑡ℎ𝑒 𝑏𝑎𝑠𝑒𝑑 𝑦𝑒𝑎𝑟
x 100
CPI in 2019 =
1040
1040
x 100 = 100
CPI in 2020 =
1700
1040
x 100 = 163.46
CPI in 2021 =
2280
1040
x 100 = 219.23

10. *CPI in 2019 = 100
*CPI in 2020 = 163.46
*CPI in 2021 = 219.23
3. Calculate the inflation rate 2020 and 2021:
Inflation rate 2020 =
163.46 −100
100
x 100% = 63.46%
Inflation rate 2021 =
219.23 −163.46
163.46
x 100% = 34.11%

11. INFLATION ADJUSTMENT OR DEFIATION
- is the process of removing the effects of price of
inflation from data. It makes sense to adjust only
data that is currency denominated in this way.
PRICE INDICES
- is a normalized average of price relatives for a
given class of goods or services in a given region,
during a given interval of time.

12. Different types of Price Indices:
1.The Wholesale Price Index – it includes prices of the goods sold in
the wholesale market.
2.The Consumer Prize Index – it include prices of goods and services
sold in the retail market.
3.The Procedure Prize Index – it includes procedure or output which
are the prices of the first commercial transactions of goods and
services on the point of first sale.
4.The GDP Deflator – is the total value of the goods and services
produced in an economy in a year.
5. Private Final Consumption Expenditure Deflator – is the
expenditure incurred by households and its deflator measures the
change in it at by dividing its value at current prices by its value in the
base year.

13. NOMINAL AND REALVALUES
- the nominal price of a security is its stated value, its redemption
price or its unadjusted price, without taking into account inflation
and other factors.
COST OF INFLATION
- the cost of inflation include menu, shoe leather costs, loss of
purchasing power and the redistribution of wealth and other
costs.

14. SALAMAT
SA
PAGPAMINAW
CLASSMATES!!
P A D AY O N