inflation - Inflation Sandeep Bhaskar Temple University...

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Unformatted text preview: Inflation Sandeep Bhaskar Temple University Sandeep Bhaskar (Temple University) Inflation 1 / 25 Outline 1 Introduction 2 Theories of Inflation 3 Impact of Inflation 4 Inflation and Unemployment Sandeep Bhaskar (Temple University) Inflation 2 / 25 Introduction Inflation Inflation can be defined as the sustained increase in the general price level. It can also be defined as the fall in the market value or purchasing power of money. Note that a one time increment in the price level, or the increment of the price of one good is not termed inflation. The price increase has to be a sustained one, and should be of the general price level. Sandeep Bhaskar (Temple University) Inflation 3 / 25 Introduction Measuring Inflation Inflation can be thought of as a measure of cost of living . To calculate inflation we need to do the following: Compose a basket of goods . Assign weights to each component of the basket. Calculate the price of the basket in the base year (base period) and compare it with that in the current year. Sandeep Bhaskar (Temple University) Inflation 4 / 25 Introduction Calculating Inflation Rate Once we have determined a basket of goods, and found out the value of the basket in the base year and the current year we can estimate the inflation rate. If P b is the value of the basket in the base year, and P c is the value of the basket in the current year, then the inflation rate, , is given by = P c- P b P b 100 . Sandeep Bhaskar (Temple University) Inflation 5 / 25 Introduction Various Price Indices Inflation rate can be measured using prices at different stages of production. Depending on which prices are being used we get different price indices, namely: Consumer Price Index (CPI): using prices at the retail level. Producer Price Index (PPI): using prices at the production level or factory gate prices. GDP Deflators: does not use a basket of goods, but measures the price level in the economy as a whole. Sandeep Bhaskar (Temple University) Inflation 6 / 25 Theories of Inflation Theories of Inflation Keynesian Theory: Supply of money is a major, but not the only, cause of inflation. Inflation is just the pressures in the real economy expressing itself through prices. Monetarist Theory: Inflation is an increase in supply of money. Austrian Theory: Inflation is an increase in the supply of money. Inflation depends not only on how much money supply is growing by, but also on how the money supply is growing....
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inflation - Inflation Sandeep Bhaskar Temple University...

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