Transcript Inflation - kristinaaustin

6.00 Understand economics trends and
communication.
6.02 Understand economic
indicators to recognize economic
trends and conditions.
5-170 5-171 Defining
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Inflation: A persistent increase in the average price level in
the economy.
Inflation Rate: The percentage change in the price level
from one period to the next.
Deflation: A persistent decrease in the average price level in
the economy.
Consumer Price Index: An index of prices of goods and
services typically purchased by urban consumers.
Standard of Living: The amount of goods and services that
a nation’s people have
Targeted Inflation Rate: An acceptable rate of increase
that the country attempts to control
Price Stability: The condition in which the average price
level in the economy changes very slowly, if at all.
Inflation
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Describe causes of inflation.
◦ Inflation results when the economy has too much demand
for available production.
◦ The two causes of inflation:
 Demand-pull inflation results when economy-wide
shortages are created by increases in aggregate demand.
 Cost-push inflation results when an economy-wide
shortages are created by decreases in aggregate supply,
which are so named because they are more often than not
triggered by increases in production cost.
Inflation
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Explain how inflation impacts the economy.
◦ Makes products more expense, shifting how
consumers will spend
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Describe the relationship between price
stability and inflation.
◦ Price stability means that inflation rates will be
low
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Explain problems associated with deflation.
◦ Manufacturers will be earning smaller profits or
losing money as deflation occurs
Deflation
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Explain problems associated with deflation.
◦ Deflation can haphazardly redistribute income and
wealth. If some prices decrease more than others,
then income and wealth is redistributed to the
owners of those resources with the smaller price
decreases.
◦ Deflation creates uncertainty. If prices
unexpectedly decline, then consumers and
producers alike might be less willing to pursue
long-term activities, because they just do not know
what will happen to the price level.
Inflation
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Discuss reasons why the inflation rate
should be above zero.
◦ Indicates that demand is growing
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Explain how businesses can use the
Consumer Price Index.
◦ It provides timely information for consumers,
businesses, and government leaders who
make decisions that are sensitive to inflation.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=inflation
CPI
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Discuss the purpose of the Consumer Price
Index (CPI).
◦ The CPI is commonly used as: (1) an indicator of the
price level and economic activity, (2) a method of
converting nominal economic indicators to real terms,
and (3) a means of adjusting wage and income
payments for inflation.
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Describe how the Consumer Price Index is
determined.
◦ an index of prices of goods and services typically
purchased by urban consumers. This index, compiled
and published monthly by the Bureau of Labor
Statistics, provides a relatively accurate indication of
the average price level in the economy, and thus
inflation.
CPI
total expenditures on
market basket in current period
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CPI = total expenditures on
market basket in base period
x 100
CPI
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Identify the major kinds of consumer
spending that make up the Consumer
Price Index.
◦ measures goods typically purchased by urban
consumers
5-170 5-171
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Explain how the Consumer Price Index is used to
find the rate of inflation.
◦ CPI measures the prices of a fixed market basket of
goods
◦ If their price is going up, inflation is occurring
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Describe limitations on the use of the Consumer
Price Index.
◦ CPI excludes goods purchased by rural consumers. It
also excludes capital goods purchased by the business
sector and the whole myriad of purchases made only
by the government and foreign sectors.
◦ Measures about 60% of the economy and misses 40%
5-172 5-173 Define
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Gross Domestic Product (GDP):
◦ the market value of the goods and services produced BY a
country.
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Personal Consumption Expenditures:
◦ measures household consumption expenditures on gross
domestic product. Personal consumption expenditures are
far and away the largest and most stable of the four
expenditures, averaging about 65 to 70 percent of gross
domestic product.
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Gross Private Domestic Investment:
◦ measuring capital investment expenditures. Gross private
domestic investment is expenditures on capital goods to
be used for productive activities in the domestic economy
that are undertaken by the business sector during a given
time period
Define
Government purchases of goods and services:
◦ Expenditures made by the government sector on final
goods and services, or gross domestic product.
Government purchases are used to buy the goods and
services needed to operate the government (such as
administrative salaries) and to provide public goods
(including national defense, highway construction).
◦ Government purchases annually account for about 10 to
15 percent of the total or aggregate expenditures on gross
domestic product.
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Net exports of goods and services: the official
government measure of net exports with the foreign
sector, the difference between exports and imports.
◦ They are positive when exports are greater than imports
and negative when exports are less than imports.
Define
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Trade deficit:
◦ importing more than we export
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Trade surplus:
◦ exporting more than we import
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Uncounted production:
◦ production not tracked or counted in economic
measurements
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Underground economy: “off the books”
Double counting:
◦ shows up two ways in the measurements
GDP
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Identify the categories of goods and services that make up
GDP.
◦ Consumption – largest component
◦ Investment
◦ Government
◦ Net exports – exports minus imports
http://www.quickmba.com/econ/macro/gdp/
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Describe problems encountered in calculating GDP.
◦ Getting all production reported
 Underground or uncounted
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Explain the importance of a country's GDP.
◦ one the primary indicators used to gauge the health of a
country's economy It represents the total dollar value of all
goods and services produced over a specific time period - you
can think of it as the size of the economy.
http://www.investopedia.com/ask/answers/199.asp#ixzz1hBoT3I
Gy
5-172 5-173
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Describe ways to increase GDP.
◦ Invest in infrastructure, enforce laws, lower
taxes (usually short-term)
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Describe how the government responds
to changes in GDP.
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Describe ways that businesses respond to
changes in GDP.
5-174 5-175 Defining
Unemployment rate:
 Frictional unemployment:
 Structural unemployment:
 Cyclical unemployment:
 Seasonal unemployment:
 Technological unemployment:
 Full employment:
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Discuss individual costs of unemployment.
 Describe economic benefits of
unemployment.
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Explain theories of the causes of
unemployment.
 Explain why the unemployment rate
understates employment conditions.
 Describe the costs of unemployment for
a nation.
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5-176 5-177 Defining
Interest rate:
 Nominal interest rate:
 Real interest rate:
 Interest-rate fluctuation:
 Default risk, liquidity risk:
 Maturity risk:
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Discuss causes of interest-rate
fluctuations.
 Explain the impact of interest rate
fluctuations on an economy.
 Describe the relationship between
interest rates and the demand for money.
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Describe the relationship between inflation
and interest rates.
Discuss factors that create differences in the
amount of interest charged on credit
transactions (e.g., levels and kinds of risk,
borrowers’ and lenders’ rights, and tax
considerations).
Describe kinds of risk associated with
variances in interest rates (i.e., default,
liquidity, and maturity).
5-176 5-177
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Explain how fiscal policies can affect
interest rates.
5-178 5-182 Defining
business cycles,
 expansion,
 peak,
 contraction and
 trough.
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Identify the phases of a business cycle.
 Describe the expansion phase of a
business cycle.
 Describe the peak phase of a business
cycle.
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Describe the contraction phase of a
business cycle.
 Describe the trough phase of a business
cycle.
 Explain how knowledge of business cycles
benefits businesspeople.
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Describe internal causes of business
cycles.
 Explain external causes of business cycles.
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