Chapter 7 - Inflation and the measurement of prices. After completing this unit, you should be able to: Explain the difference between the face value of money and the purchasing power of money, describe inflation and calculate inflation across time periods, describe the winners and losers from inflation,…
Trang 1Introduction to Economics: Social Issues and Economic Thinking
Wendy A Stock
PowerPoint Prepared by
Z Pan
Chapter 7
Inflation and the Measurement of Prices
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Trang 2Ø Explain the difference between
the face value of money and the
purchasing power of money
Ø Describe inflation and calculate
inflation across time periods
Ø Describe the winners and losers
After studying this chapter, you should be
able to:
Trang 3Ø Inflation is the rise in the general level of prices
in an economy.
Ø Zimbabwe’s hyperinflation
Ø Inflation rate 11.2 million percent per year
Ø prices doubled every 25 hours!
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& Sons, Inc.
3Inflation
Trang 4Ø The Face Value of Money is determined by
governments and printed on currency.
Ø The Purchasing Power of Money reflects the amount of goods and services that a given unit
of money could be used to acquire.
THE VALUE AND USES OF MONEY
Trang 5Three Roles of Money:
a means of payment for goods and services or repayment of debt.
measure of the worth of goods or services.
Ø Store of Value – Money can be saved and used
to purchase goods and services at a future time.
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& Sons, Inc.
5Definition of Money
Trang 6Ø Commodity Money has value for its own sake, in
addition to its value as money
Ø e.g gold, silver, shells, stones, decorated belts,
cigarettes, and alcohol
Ø Fiat Money has value because of government law or regulation
e.g Federal Reserve Notes, most paper money
Evolution of money
Trang 7Ø Price Index - A measure of the average prices of a given set of goods or services across time.
Ø Consumer Price Index (CPI) is the ratio of the cost
of the market basket in one year over the cost of the market basket in the base year multiplied by 100
Ø A Market Basket is a fixed set of goods or services whose prices are tracked across time
Copyright © 2013 John Wiley
& Sons, Inc.
7MEASURING PRICES AND INFLATION
Trang 8MEASURING PRICES AND INFLATION
Trang 9Three Steps:
1) Finding the prices in the market basket
2) Computing the cost of the market basket in each
year3) Calculating CPI by taking the ratio
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& Sons, Inc.
9Calculating cpi: an example
Trang 10Calculating cpi: an example
Trang 11Copyright © 2013 John Wiley
& Sons, Inc.
11U.S Consumer price index
Trang 12Inflation rate
Trang 13Copyright © 2013 John Wiley
& Sons, Inc.
13Calculating inflation rate – an example
Trang 14U.S inflation rate (1950-2010)
Trang 15Disinflation is a period of positive but falling inflation Disinflation indicates a slowing of the rate of price
increase in the economy
Deflation is negative inflation Deflation indicates a period of declining prices of goods and services
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& Sons, Inc.
15Deflation and Disinflation
Trang 16World inflation comparison
Trang 17Ø Government printing too much money
Ø Demand Pull Inflation
Ø Cost Push Inflation
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& Sons, Inc.
17Sources of INFLATION
Trang 18Demand-pull Inflation arises from increases in
aggregate demand
Sources of INFLATION
Trang 19Cost-push Inflation arises from decreases in
aggregate supply
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& Sons, Inc.
19Sources of INFLATION
Trang 20Ø Nominal Values are values that have not been
adjusted for inflation
Ø Real Values are values that have been adjusted for inflation
MEASURING NOMINAL AND REAL
VALUES
Trang 21Copyright © 2013 John Wiley
& Sons, Inc.
Your starting salary as a school teacher = $45,000
Will you make more than she did in real
earnings?
Trang 22MEASURING NOMINAL AND REAL
VALUES
values in base year (base year = 1982 – 84)
Real value in base year = (nominal value in
current year/CPI in current year) x 100
Trang 23Copyright © 2013 John Wiley
& Sons, Inc.
Your starting salary as a school teacher = $45,000
Grandma’s real salary = ($6,500/29.6) x 100 =
$21,959 in 1982–84 dollars.
Your real salary = ($45,000/220.2) x 100 =
$20,436 in 1982–84 dollars.
Trang 24During 2011, many citizens in the Middle
East called for governmental reform In some countries, oil production was reduced in the face of protests Use an AD/AS diagram to illustrate the potential impact of these
outcomes on inflation in the United States.
Trang 25Copyright © 2013 John Wiley
& Sons, Inc.
25
Key Concepts
• Inflation
• Face value of money
• Purchasing power of money