Transcript Inflation - Cloudfront.net

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Gross Domestic Product (GDP)
Gross National Product (GNP)
InflationSo
rate
with the economy
Poverty rate
Unemployment
Stock market
Job growth rate
National debt
Inflation
Definition
I.
A.
a general rise in price levels as measured
by the Consumer Price Index (CPI)
B.
Consumer Price Index (CPI)

Reports on price changes from a sample (market
basket) of 90,000 goods and services from over
300 categories and compared to the 1982-4
base-year prices.
Three Rates of Inflation
II.
Creeping Inflation
A.
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Slow rate, manageable
Single-digit inflation rates
>10%
Recent Inflation Rates
4.00%
3.50%
3.00%
2.50%
2.00%
Inflation Rate
1.50%
1.00%
0.50%
0.00%
-0.50%
2006
2007
2008
2009
B.
Galloping inflation
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Dangerous rates of inflation
Double-digit inflation rates
10% or more
C.
Hyperinflation
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Out-of-control rate of inflation; triple digits
50% inflation rate per month
600%+
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1967: a dollar from Brazil was worth one
one-trillionth of one US cent in 1994
dollars
World’s record on hyperinflation:
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Hungary in 1946 when hyperinflation doubled
prices every 13.5 hours
2nd place:
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Zimbabwe, 2008
1,000 dollar bill so worthless, was used as
toilet paper
Annual inflation rate: 516 quintillion percent
(516,000,000,000,000,000,000%).
The monthly inflation was 13.2 billion percent
Room service menu
at the Holiday Inn
in Bulawayo, Zimbabwe
Causes
III.
1.
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Demand-pull theory
Demand in all sectors of the economy
exceeds supply  shortage  price
increases (prices pulled up due to excessive
demand)
P
S
D2
D
Q
2.
Deficit Spending (govt. spending more
than it “makes”)
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Same as demand-pull, but cause of
excessive demand blamed on government’s
deficit spending
$14 trillion now!
3.
Rising costs of inputs (Cost-pull)
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labor
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Union  higher wages  higher costs of
production  higher prices to cover higher costs
products
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1970’s: oil price per barrel increased 600%
4.
Wage-price spiral
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No single group to blame. Self-perpetuating
spiral of wages and prices feed off each
other.
higher prices  higher wages  higher
costs  higher prices  higher wages 
etc…
5.
Excessive monetary growth
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Money supply exceeds the dollar value of all
goods and services within the economy (real
GDP). Excess money in the economy creates
a demand-pull effect
Consequence of Inflation
IV.
Dollar buys less
1.
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People on fixed incomes hurt most by inflation
1974 one scoop of ice cream:
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$1 buys 20 single-scoop
ice cream cones at Thrifty’s
Today?
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$1 buys 1 scoop at Right Aid
2.
Spending habits change
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Buy fewer “big-ticket” items (expensive
items)
3.
Risky investments
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As prices increase, some take advantage of
rising prices of gems, artwork, etc. Prices
expected to continue rising in hopes of
buying low, selling high for a profit
4.
Change in income distribution
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Debtors pay debts with inflated dollars
which have less purchasing power than
when they borrowed them
 WHAT?!
Questions
1.
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3.
4.
5.
6.
7.
Describe the demand-pull theory of inflation
Who is most hurt by inflation?
Who is responsible for inflation when deficit
spending is to blame?
What type of products lose demand most
under inflationary conditions?
What effect does inflation have on the dollar?
How do higher oil prices affect inflation?
What rate of inflation would an inflation rate of
2.8% be?