lecture14 - Lecture 14: Inflation Inflation has been...

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Lecture 14: Inflation Inflation has been described as the situation that occurs `when nobody has enough money because everybody has too much.' It may more usefully be defined as the rate at which the purchasing power of money declines over time. For this to make any sense, we need some measure of the purchasing power of money, distinct from its face value. We can, for example, consider the weight of grain that can be purchased per dollar, or the number of floating-point operations that can be performed per dollar, or the number of hours of human labour that can be purchased per dollar. Each of these measures will give different values for inflation; for example, a dollar will buy less wheat and fewer hours of labour than it did ten years ago, but it will buy many more floating-point operations. Statistics Canada measures inflation by calculating the purchase price of a standard set of items, chosen to represent the consumption patterns of a middle-class Canadian family. This yields an index, known as the Consumer Price Index, or CPI. A second index, the Industry Selling Price Index , measures inflation in the wholesale price of goods, and a third, the Implicit Price Index , measures inflation in the cost of goods and services. By any of these measures, the purchasing power of money has declined monotonically since 1953 (when there was a brief period of deflation). The rate of inflation has varied over time; in the US and Canada, the inflation rate was less than 2% per annum between 1953 and 1965, but it rose to almost 9% during the decade 1973-1982. Currently it is about 3%. (The monotonic decline in the value of money is not a law of nature, or even a law of economics. Last century, for example, the value of money increased more than it fell.) Some other countries have experienced much higher inflation rates; for example, the Weimar Republic in the early 1920's suffered inflation at a rate much greater than 100% (largely due to the strain on the German economy resulting from the war debts imposed on it by the victors of World War 1.) Hungary, in 1946, experienced inflation at such a rate that banks issued certificates for 1 octillion pengoes (10 27 pengoes). Israel, during the Eighties, experienced an inflation rate of about 150% per year; more recently, the former USSR has experienced inflation at 1000% per year. In 1992, Zaire's currency inflated by 7000%. This phenomenon, hyperinflation , is an example of positive feedback: if the inflation rate rises, holding cash becomes less attractive, so people rush to exchange it for goods. This increases the demand for goods, and hence their price goes up, exacerbating the inflation. The causes of inflation are part of the subject matter of macroeconomics, and hence beyond the scope of this course. We note that governments can easily produce inflation by printing money at a rate greater than the underlying growth rate of the economy, but this is not the only possible cause; for example, there was massive inflation in sixteenth-century Europe, which used gold-based currencies, due to the influx of gold
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lecture14 - Lecture 14: Inflation Inflation has been...

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