Transcript Inflation

Inflation
By.. Brent, Bob, Vikrant & Leslie
What is Inflation?

Inflation is defined as a sustained increase in
the general level of prices for goods and
services. It is measured as an annual
percentage increase. As Inflation rises, every
dollar you own buys a smaller percentage of a
good or service.
 The value of a dollar does not stay constant
when there is inflation. The value of a dollar is
observed in terms of purchasing power, which
is the real, tangible goods that money can
buy.
Continued..

One important fact to know about inflation is
that when inflation goes up, there is a decline
in the purchasing power of money.
Example: For example, if the inflation rate is 2%
annually, then technically a $1 pack chocolate
bar will cost $1.02 in a year. After inflation,
your dollar can't buy the same goods that it
could buy before.
The Variations of Inflation

Deflation- This is when the general level of
prices is failing and this is basically just the
opposite of inflation.
 Hyperinflation- This is usually rapid inflation,
this can usually lead to the breakdown of a
nations monetary system.
 Stagflation- This is like the combination of high
employment and economics stagnation with
inflation.
The Consumer Price Index (CPI)
This is a measure of price changes for a
typical basket of consumers.
 This index basically monitors price
changes of consumer products and
determines what typical Canadian
household purchase.
 By looking at statistics, Canada surveys
their buying habits every few years.

Product Quality

The index cant have any effect in changes in
the quality that are unmatched by the a
change in the price.
Example: Items that are in the CPI shopping
basket like medicines and TV's may improve a
great deal in quality yet, their prices may
actually not even rise. In fact they could even
decrease so even while the standard of living
may grow because of the increased quality,
this might not be reflected in the CPI.
A Change in Spending Patterns
Changes in consumption patterns are
still going on and quite gradual even
while Statistics Canada surveys
households on a regular basis to update
the contents and item weights of the
“shopping basket”.
 As well the consumers tend to buy less
of the products whose prices seem to
rise most.

Nominal Versus Real Income

The CPI is useful for helping the consumers
determine the cost of living( the amount
consumers must spend on the entire range of
goods and services they purchase).
 To see how the consumers purchasing power
is affected by inflation, we can express their
nominal income( the income expressed in
current dollars) or income valued in current
dollars as a real income( income expressed in
constant base-year dollars).
The GDP Deflator

The GDP Deflator is an indicator of price
changes for all goods and services
produced in the economy which is what
separates it form the CPI.
Nominal Versus Real GDP
Gross Domestic Product or (GDP) is
expressed in current dollars.
 The Real GDP gives an indication of the
purchasing power of an entire economy
and to find the real GDP, economists and
statisticians divide nominal GDP by the
GDP deflator.

Incomes

Many Labor Unions negotiate income
adjustments for their members and as a result
the workers wages are adjusted using the CPI
or costs of living.
 Costs-of-living- adjustment clauses are
provisions for income adjustments to
accommodate changes in price levels, which
are included in wage contracts.
 Fully indexed incomes are nominal incomes
that automatically increase the rate of inflation
so in this case the nominal income rises at the
same rate as the prices.
Continued..

Partially indexed incomes are nominal
incomes as well that increase by less than the
rate of inflation.
 This causes real incomes to fall
 In contrast with indexed and partially indexed
incomes, fixed incomes are nominal incomes
that remain fixed at some dollar amount
regardless of the rate of inflation. Basically
these incomes do not change at all in
response to inflation.
Borrowing and Lending






In this case there are two interests rates:
Nominal interest rate- which is the interest rate expressed in
money terms. The nominal interest rate is basically the growth
rate of your money
Real interest rate- which is the nominal interest rate minus the
rate of inflation, so:
Once Nominal interest rate is agreed on, it is then fixed and so
the lenders try to anticipate the rate of inflation for the loan period
and make it into the nominal interest rate.
And this rate that is built into the nominal interest rate is called the
inflation premium.
The proper definition for inflation premium is- a percentage built
into a nominal interest rate to anticipate the of inflation for the
loan period.
Costs of Inflation






Inflation can be anticipated or unanticipated.
If the inflation rate corresponds to what the majority of people are
expecting (anticipated inflation), then we can compensate and the
cost isn't high.
Conflict can arise when there is unanticipated inflation, like:
(1) Creditors lose and debtors gain if the lender does not
anticipate inflation correctly. For those who borrow, this is similar
to getting an interest-free loan.
(2) Uncertainty about what will happen next makes corporations
and consumers less likely to spend. This will hurt the economic
output in the long run.
(3) If the inflation rate is greater than that of other countries,
domestic products become less competitive.
Continued..

People like to complain about prices getting higher, but
they often ignore the fact that wages should be rising
as well. The question shouldn't be whether inflation is
rising, but whether it's rising at a quicker pace than
your wages.

THE END