Transcript 6-4Infldefla

Inflation and Deflation
6-4
Correcting for prices
• There is a need to correct for prices
changing
• This an important idea and you will see it
over and over again in this course.
• Pay attention to the next slide!
The vocabulary
• A nominal measure is a measure that
has not been adjusted for changes in
prices over time.
• A real measure is a measure that has
been adjusted for changes in prices over
time.
• The aggregate price level is the overall
level of prices in the economy.
Real Wages
• Economist typically express wages in
real terms
• Real wages is a better indicator of the
actual change in the workers’
purchasing power over time
Consumer price index from 1913 to 2004
Aggregate Prices
• Aggregate Price Level is the overall
price level for final goods and services in
the economy.
Inflation and Deflation
A rising aggregate price level is
inflation.
A falling aggregate price level is
deflation.
The inflation rate is the annual percent
change in the aggregate price level.
Indexes and Deflator
•
The two most widely used measures:
1. The CPI
2. The GDP Deflator
•
There are other indexes in chapter 7
we will cover all of these in more
detail.
Price Stability
• Both inflation and deflation can pose
problems for the economy
• Policy makers hope to achieve price
stability.
• The economy has price stability when
the aggregate price level is changing only
slowly.
Inflation and deflation since 1929
NO Hamburgers are Cheaper today!
▪ No ─ in fact, a burger is, compared with
other consumer goods, a better bargain
than it was in 1954. Burger prices have
risen about 400%, from $0.15 to about
$0.75, over the last half century. But the
overall consumer price index has increased
more than 600%.
▪ If McDonald’s had matched the overall price
level increase, a hamburger would now cost
between 90 cents and $1.00.