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Module 7 Notes

Module 7 Notes - Module 7 Notes Inflation is when most...

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Module 7 Notes: Inflation is when most prices in an entire economy are rising. Extreme form of inflation is called hyperinflation. Inflation is a general and ongoing rise in the level of prices in an entire economy. Inflation implies an ongoing rise in prices. Inflation is an increase in the average level of prices, and deflation is a decrease in the average level of prices. The rate of inflation or deflation is the percentage rate of change in a price index between two periods. Rate of inflation/deflation= Percentage change in index/initial value of index Example: (2.073-2.016) / 2.016=0.028 =2.8% “If the Consumer Price Index was 120 at the end of last year and 125 at the end of this year, Americans experienced which of the following?” Answer: Inflation, a decrease in the purchasing power of a dollar Most commonly cited measure of inflation in the United States is the Consumer Price Index (CPI). CPI is calculated by government statisticians at the U.S. Bureau of Labor Statistics based on the prices in a fixed basket of goods and services that represents the purchases of the average family of four. substitution bias —the rise in the price of a fixed basket of goods over time—tends to overstate the rise in a consumer’s true cost of living, because it does not take into account that the person can substitute away from goods whose relative prices have risen. The Eight Major Categories in the Consumer Price Index 1. Food and beverages (breakfast cereal, milk, coffee, chicken, wine, full-service meals, and snacks) 2. Housing (renter’s cost of housing, homeowner’s cost of housing, fuel oil, bedroom furniture) 3. Apparel (men’s shirts and sweaters, women’s dresses, jewelry) 4. Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance) 5. Medical care (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services) 6. Recreation (televisions, cable television, pets and pet products, sports equipment, admissions) 7. Education and communication (college tuition, postage, telephone services, computer software and accessories) 8. Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses) CPI helps households understand their overall cost of living from month to month, while the core inflation index is a preferred gauge from which to make important government policy changes.
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CPI tracks prices from physical locations, and not at online sites like Amazon, where prices can be lower. BLS= Bureau of Labor Statistics Producer Price Index (PPI) is based on prices paid for supplies and inputs by producers of goods and services. It can be broken down into price indices for different industries, commodities, and stages of processing (like finished goods, intermediate goods, crude materials for further processing, and so on).
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  • Spring '14
  • Sloan
  • Inflation, Consumer price index

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