ISS_225_Lec_8_Economics

# Deflation is a decrease in the average price level of

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Deflation is a decrease in the average price level of goods and services. During the Great Depression of the 1930's, the United States experienced a period of deflation. Since the 1950's, the United States' inflation rate has ranged from a low of zero to a high of thirteen percent, with most years averaging around 4 percent The United States government uses the consumer price index to measure the rate of inflation. The consumer price index (CPI), measures changes in the average price of consumer goods and services. This index is compiled monthly by the Bureau of Labor Statistics (BLS). Each month officials at the BLS contact retail store, homeowners, and tenants in selected cities around the country to record average prices for a "market 8

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ISS 225 – Power, Authority, Exchange Economic Order basket" of different goods purchased by the typical family (approximately 90,000 items). So the CPI then looks at the average prices paid by a variety of people, in a variety of locations, buying a variety of products. The CPI equals the cost of products of the current year divided by the cost of products in a base year multiplied by 100. Therefore, the annual rate of inflation (ARI ) is ARI = CPI in given year - CPI in previous year CPI in previous year Multiply this by 100. One problem with the CPI is that many consumers have a different "market basket" of goods than the CPI's market basket. This difference may over or under state the impact of inflation. An example would be retired persons. They may buy some products (prescription drugs) that the average family does not. Another problem is the CPI does not make adjustments for changes in quality. For example, look at new computers. A new computer can do significantly more work than an older one and probably costs less. Finally, the CPI does not make allowances for the law of demand and the substitution of goods. For example, if the price of oranges increases, the demand will decrease, and consumers could then buy cheaper apples, thus overstating the rate of inflation. There are two types of inflation. Demand-pull inflation is a rise in prices due to too much spending (demand). In other words it is " too many dollars chasing too few goods" . Demand-pull inflation occurs when sellers are unable to supply all the goods and services buyers demand. The second type of inflation is cost-push. Cost-push inflation is a rise in prices due to an increase in the cost of production. Increases in the cost of labor, raw materials, equipment, and borrowing money push up the cost of production. For a look at U.S. inflation rates over time see - states/inflation-cpi or . IV. Goals Of Economic Policy A. Economic Growth Every politician and political party wants economic growth. Every American wants more of everything. Growth is measured by GDP.
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