Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
32 views2 pages

Inflation Notes

The document discusses inflation, focusing on price indexes such as the Consumer Price Index (CPI) and GDP deflator, which measure changes in price levels. It explains the causes of inflation, including demand-pull and cost-push factors, and outlines its effects on purchasing power, income, and wealth distribution. An example illustrates how to calculate the price index and inflation rate using a market basket of goods.

Uploaded by

tkittyb2003
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
32 views2 pages

Inflation Notes

The document discusses inflation, focusing on price indexes such as the Consumer Price Index (CPI) and GDP deflator, which measure changes in price levels. It explains the causes of inflation, including demand-pull and cost-push factors, and outlines its effects on purchasing power, income, and wealth distribution. An example illustrates how to calculate the price index and inflation rate using a market basket of goods.

Uploaded by

tkittyb2003
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Class Notes on Inflation

Price index
- Price indexes are used to measure inflation.
- A price index is a weighted average of prices of a select basket of goods.
- The price index compares the price of the basket of goods in the current year with the price of the
same (or similar) basket of goods in the base year.

Consumer Price Index (CPI)


- The most popular price index.
- Computed each month by the Bureau of Labor Statistics using a bundle of commodities and services
that is meant to represent the “market basket” purchased monthly by the typical urban consumer or
household.
- The market basket consists of a number of broad categories of household expenditures including
apparel, education and communication, food and beverages, housing, medical care, recreation, and
transportation.

GDP deflator (GDP price index)


- Measures the price level of all domestically produced final goods and services in an economy in a year.
- Measured by calculating the ratio of nominal to real GDP.

Inflation rate
- If the price index increases from year to year, the economy is experiencing inflation.
- Inflation rate is the percentage increase in the price index from one year to the next.

Causes of inflation
- Demand-pull inflation occurs when demand for goods and services outpaces supply.
- Cost-push inflation results from a large increase in the price of key inputs for production.

Effects of inflation
- Price effect: inflation affects purchasing power.
- Income effect: inflation affects redistribution of income in the economy.
- Wealth effect: inflation affects redistribution of wealth between lenders and borrowers.

Example: Calculating price index and inflation


Table: Cost of Market Basket
Price in 2018 Price in 2019
Loaf of bread $2.00 $2.20
Gallon of gasoline $3.00 $3.10
Suppose 2018 is the base year (price index = 100).
The typical consumption (market basket) for the purpose of constructing a price index consists of 100 loaves of
bread and 200 gallons of gasoline.
a. What is the value of the price index in 2019, using 2018 as the base year?
b. What is the rate of inflation between 2018 and 2019 in this economy?
Answer: Calculating price index and inflation

Table: Cost of Market Basket


Price in 2018 Price x Quantity Price in 2019 Price x Quantity
2018 2019
Loaf of bread $2.00 $2 x 100 = $200 $2.20 $2.20 x 100 = $220
Gallon of gasoline $3.00 $3 x 200 = $600 $3.10 $3.10 x 200 = $620
The cost of market
basket $800 $840
(total spending)

a. Price index in 2019 = ($840/$800) x 100 = 105.

Hint: Calculate the cost of market basket for 2018 and the cost of market basket for 2019.
Then, calculate the price index.

b. Inflation rate = [(105 – 100) / 100] x 100 = 5%.

Hint: The inflation rate is the yearly percentage change in the price index.

You might also like