Transcript Inflation Power Point File

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Inflation is generally defined as a continual
increase in the overall level of prices.
◦ It is an increase in average prices that lasts at least
a few months
◦ The most widely reported measurement of inflation
is the Consumer Price Index (CPI).
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The CPI compares the prices of a set of goods
and services relative to the prices of those
same goods and services in a previous month
or year
If the price level of consumer goods and
services increases over a period of time, the
consumer's purchasing power decreases
(assuming, of course, that the consumer's
disposable income and spending pattern
remain the same).
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The CPI market basket represents all the
consumer goods and services purchased by
urban households. Price data are collected for
over 180 categories, which BLS has grouped
into 8 major groups. These major groups,
with examples of categories in each, are as
follows:
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Food and beverages (ham, eggs, carbonated drinks, coffee,
meals and snacks)
Housing (rent of primary residence, fuel oil, bedroom furniture)
Apparel (men’s shirts and sweaters, women’s dresses, jewelry)
Transportation (new vehicles, gasoline, tires, airline fares)
Medical care (prescription drugs and medical supplies,
physicians’ services, eyeglasses and eye care, hospital services)
Recreation (television sets, cable TV, pets and pet products,
sports equipment, admissions)
Education and communication (college tuition, postage,
telephone services, computer software and accessories)
Other goods and services (tobacco and smoking products,
haircuts and other personal care services, and funeral expenses)
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Because each product group (energy, food,
etc.) represents a different portion of an
average consumer's spending pattern, each
category is given a "weight" or what the BLS
calls "relative importance."
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Demand is the willingness and ability to buy
specific quantities of a good or service at
different prices in a specific time period, all
things remaining the same.
The amount of a good or service that
consumers are willing and able to buy at a
certain price.
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The law of demand states that people will buy
more of a good or service at lower prices and
less at higher prices, if everything else
remains the same.
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Demand-pull Inflation: This type of inflation
occurs when total demand for goods and
services in an economy exceeds the supply of
the same. When the supply is less, the prices
of these goods and services would rise,
leading to a situation called demand-pull
inflation. This type of inflation affects the
market economy adversely during the
wartime.
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Cost-push Inflation: As the name suggests, if
there is increase in the cost of production of
goods and services, there is likely to be a
forceful increase in the prices of finished
goods and services. For instance, a rise in the
wages of laborers would raise the per-unit
costs of production and this would lead to
rise in prices for the related products. This
type of inflation may or may not occur in
conjunction with demand-pull inflation
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Hyperinflation: Hyperinflation is also known
as runaway inflation or galloping inflation.
This type of inflation occurs during or soon
after a war. This can usually lead to the
complete breakdown of a country's monetary
system. However, this type of inflation is
short-lived. In 1923, in Germany, inflation
rates touched approximately 322 percent per
month with October being the month of
highest inflation.
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Fiscal Inflation/Quanity Theory: Fiscal
Inflation occurs when there is excess
government spending. This occurs when
there is a deficit budget. For instance, fiscal
inflation originated in the US in the 1960s. At
that time, Johnson was the president of the
US. also faced fiscal type of inflation under
the presidency of George W. Bush due to
excess spending in the defense sector.
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Deflation
In contrast to the definition of inflation,
deflation can be defined as 'the fall in the
general price level of good and services in an
economy'. The purchasing power of money
increases, i.e., the real value of money
increases and an individual can buy more
quantity of goods than before with the same
amount of money.
 What
types of people are most
negatively affected by inflation
and the depreciation of the
dollar?
 People
with fixed incomes.
Retired people often live off of
a fixed income so they are
negatively affected by
inflation.
 Lenders
are generally hurt
more than Borrowers during
long inflationary periods,
which mean that loans made
earlier are repaid later in
inflated dollars.
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The gross domestic product (GDP) is 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.
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Usually, GDP is expressed as a comparison to
the previous quarter or year. For example, if
the year-to-year GDP is up 3%, this is
thought to mean that the economy has grown
by 3% over the last year.
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The formula for determining GDP is C+I+G+X
= GDP
C = Personal consumption expenditures
I = Nonresidential fixed investment
G= Government expenditures
X= New exports (Exports minus imports)
Other Measures of U.S. Output
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"Real gross domestic product -- the output
of goods and services produced by labor and
property located in the United States
2014 GDP:$17.4183 trillion
 GDP increased 3.9 percent, or $650.2 billion,
in 2014
2014 GDP per capita
$54,678.
Population:313.9 million
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Rank Country GDP (billions of $)
2015
1 United States
17968
2 China
11385
3 Japan
4116
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Real GDP is the current dollar GDP adjusted
for inflation. It reflects the current value of all
of the goods and services produced in a year,
expressed the prices of the base-year. It
might also be called "inflation-corrected" GDP
or "constant dollar GDP
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With 4.4% of the world's population, the U.S.
produced 22.3% of world GDP in 2012.
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http://www.statista.com/statistics/268173/c
ountries-with-the-largest-gross-domesticproduct-gdp/
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A significant decline in activity across the economy,
lasting longer than a few months. It is visible in
industrial production, employment, real income and
wholesale-retail trade.
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The technical indicator of a recession is two consecutive
quarters of negative economic growth as measured by a
country's gross domestic product (GDP)
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Recession is a normal part of the business cycle;
however, one-time crisis events can often trigger
the onset of a recession.
The global recession of 2008-2009 brought a
great amount of attention to the risky investment
strategies used by many large financial
institutions, along with the truly global nature of
the financial system.
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As a result of such a wide-spread global
recession, the economies of virtually all the
world's developed and developing nations
suffered extreme set-backs and numerous
government policies were implemented to
help prevent a similar future financial crisis.
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A recession generally lasts from six to 18
months, and interest rates usually fall in
during these months to stimulate the
economy by offering cheap rates at which to
borrow money.
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An economic depression is a severe downturn
that lasts several years. Fortunately, the U.S.
economy has not experienced an economic
depression since The Great Depression of
1929, which lasted ten years.
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The decline in the GDP growth rates were of a
magnitude not seen since:
1930 -8.6%
1931 -6.5%
1932 -13.1%
1933 -1.3%.
1938 -3.4%
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During the Depression, the unemployment
rate was 25% and wages (for those who still
had jobs) fell 42%. Total U.S. economic output
fell from $103 billion to $55 billion and world
trade plummeted 65% as measured in dollars
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An economic depression is so cataclysmic, it
almost takes a perfect storm of events to
create one.
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The Federal Reserve sought to slow down the
stock market bubble in the late 1920s.
However, once the stock market crashed, the
Fed kept raising interest rates to defend the
gold standard. Instead of pumping money
into the economy, and increasing the money
supply, the Fed allowed the money supply to
fall 30%
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This policy created massive deflation, where
prices dropped 10% each year. As people
expected lower prices, they delayed
purchases. Real estate prices plummeted
25%, and people lost their homes.
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https://www.youtube.com/watch?v=IQ_lizW5
zSI
 How
did the US get out of
the GREAT DEPRESSION?