goal #2 limit inflation - edl€¦ · · 2017-07-13type of inflation: demand pull or cost-push?...
TRANSCRIPT
![Page 1: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/1.jpg)
What causes inflation and what are the effects?
GOAL #2
LIMIT INFLATION
![Page 2: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/2.jpg)
What is a $1 worth in 2017?
Soaring Prices Make it hard to be a Foodie:http://money.cnn.com/2014/04/15/news/economy/inflation-cpi/index.html?iid=SF_E_Lead
![Page 3: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/3.jpg)
https://www.youtube.com/watch?v=UMAELCrJxt0
![Page 4: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/4.jpg)
Prices: 1999 vs. 20161999 2016
Federal Minimum Wage $5.15 $7.25
Median Household Income $39,973 $44,600 (2015)
A Gallon of Milk $3.32 $3.98
Eggs $1.08 $1.33
Stamp $0.33 $0.47
A Gallon of Gas $1.17 $2.49
Median Cost of New Home
$195,800 $379,800
CPI Inflation Calculator $1.00 $1.44
http://www.thepeoplehistory.com/pricebasket.htmlhttp://www.1990sflashback.com/1998/economy.asp
![Page 5: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/5.jpg)
1919-2013
![Page 6: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/6.jpg)
� Sustained widespread increase in price levels
� Reduces the purchasing power of money
Inflation
![Page 7: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/7.jpg)
1. The Government Prints TOO MUCH Money (QUANTITY THEORY)
3 Types of Inflation
• Growth in the money supply• Governments that keep printing money to pay debts
end up with hyperinflation.
Examples:• Germany after WWI. In 1923
inflation reached 30,000%
![Page 8: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/8.jpg)
![Page 9: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/9.jpg)
![Page 10: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/10.jpg)
![Page 11: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/11.jpg)
![Page 12: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/12.jpg)
![Page 13: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/13.jpg)
2. DEMAND-PULL INFLATION
DEMAND PULLS UP PRICES!!!• Demand increases but supply stays the same. • Correlated with lower unemployment• Sometimes a result of easy credit
![Page 14: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/14.jpg)
What is the typical relationship between inflation and unemployment?
![Page 15: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/15.jpg)
3. COST-PUSH INFLATION(aka supply-pull)
Higher production costs decrease in overall output and increase prices
A negative supply shock increases the costs of production and forces producers to increase prices.
Results in stagflation = stagnant economy with high inflation and high unemployment.
Examples: • 1970s: oil went from $2.59/barrel to $11.65.• Hurricane Katrina destroyed oil refineries and causes gas prices to go up. Companies that use gas increase their prices.
![Page 16: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/16.jpg)
A Perpetual Process:1. Workers demand raises2. Owners increase prices to pay for
raises
3. High prices cause workers to demand higher raises
4. Owners increase prices to pay for higher raises
5. High prices cause workers to
demand higher raises 6. Owners increase prices to pay for
higher raises
The Wage-Price Spiral
![Page 17: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/17.jpg)
Type of Inflation: Demand Pull or Cost-Push?
1. In her 2020 State of the Union Address, President Huynh calls for an increase in the U.S. military presence across the globe to combat a “threat to the sovereignty of the U.S. economy and trade routes.”
2. The Arab Spring of 2010 disrupts oil production and supplies worldwide. This causes OPEC and commodities speculators to raise crude oil prices to record levels.
3. The federal government raises the minimum wage to $16 an hour.
![Page 18: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/18.jpg)
Consumer Price Index (CPI)
Measuring Inflation
![Page 19: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/19.jpg)
BLS: Consumer Price Index
� Statistic that shows the average of the prices of all goods and services by tracking the prices of a specific basket of goods purchased by a typical
household (measures the cost of living) � PRICE LEVEL
How the Consumer Price Index Is Calculated
� Fix the Basket: Determine what goods the typical consumer buys.� FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
� HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
� APPAREL (men's shirts and sweaters, women's dresses, jewelry)
� TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
� MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
� RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
� EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
� OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
� Find the Prices: The BLS conducts monthly consumer surveys to find the prices of each of the goods and services in the basket for each point in time.
![Page 20: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/20.jpg)
BLS CPI Data Collection
� Prices are collected every month in 87 urban areas using 6,000 housing units and 24,000
retail establishment. Prices include tax.
� Prices are obtained by personal visits or telephone calls
� Represent 1. Urban Wage Earners and Clerical Workers – 28% of the population
and 2. All Urban Consumers (includes professional, managerial, self-employed, short-term workers, the unemployed, retired
and those not in the LF – 89% of the population
� Price changes are averaged together with weights that represent the importance of spending for each population.
![Page 21: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/21.jpg)
How the Consumer Price Index Is Calculated
� Choose a Base Year and Compute the Index:
� Designate one year as the base year, making it the benchmark against which other years are compared.
� Compute the index by dividing the price of the basket in one year by the price in the base year and multiplying by 100.
� CPI = current price
base period price
� Current base year = 1982-84, CPI = 100
� Compute the inflation rate: (π%)
The inflation rate is the percentage change in the price index from the preceding period.
� Inflation = CPI year 2 – CPI year 1
CPI year 1
X 100
X 100
![Page 22: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/22.jpg)
CPI vs. Inflation Rate
CPI = Price Level – the cost of living
Inflation – the rate at
which prices are rising
![Page 23: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/23.jpg)
Calculating the CPI and the Inflation Rate: An Example
![Page 24: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/24.jpg)
Consumer Price Index Report
![Page 25: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/25.jpg)
� Core-Inflation - the rate of inflation excluding the effects of food and energy prices.
Inflation
![Page 26: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/26.jpg)
CPI Practice Problem
Calculate the CPI for the basket of all the items above.
((3.98 + $1.33 + $0.47 + $2.49)/($3.32 + $1.08 + $0.33 + $1.17))*100 = 140.169
A basket of goods that cost $100 in 1999, would cost $140.17 in 2016
Calculate the core-CPI rate
(0.47/0.33)*100 = 142.424
*Use 1999 as the base year.
1999 2016
A Gallon of Milk $3.32 $3.98
Eggs $1.08 $1.33
Stamp $0.33 $0.47
A Gallon of Gas $1.17 $2.49
![Page 27: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/27.jpg)
Relative
Importance -
how the
average consumer spends his/her $$$
![Page 28: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/28.jpg)
![Page 29: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/29.jpg)
![Page 30: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/30.jpg)
BLS: CPI, May 2017– All Items
![Page 31: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/31.jpg)
![Page 32: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/32.jpg)
Problems with the CPI
CPI may overstate the impact of inflation on the consumer
• Substitution Bias- As prices increase for the fixed market basket, consumers buy less of these products and more substitutes that may not be part of the market basket.
• Product Quality- The CPI does not account for improvements and decline in product quality. • The price of car has increased but so has its quality
(bluetooth, gps, etc)
CPI measures prices but not the increase in choices
• The CPI market basket may not include the newest consumer products.
![Page 33: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/33.jpg)
Calculating the Inflation Rate(rate of change)
� = CPI year 2– CPI year 1
CPI year 1
CPI
2008: 215.303
2009: 214.537
2010: 218.056
2011: 224.939
2012: 229.594
2013: 233.049
2014: 234.812 (Dec)
2015: 237.945 (Sept)
X 100
![Page 34: GOAL #2 LIMIT INFLATION - Edl€¦ · · 2017-07-13Type of Inflation: Demand Pull or Cost-Push? 1. In her 2020 State of the Union Address, President Huynh calls for an increase](https://reader030.vdocuments.mx/reader030/viewer/2022020412/5b0820207f8b9a51508b695d/html5/thumbnails/34.jpg)
� From 2014 to 2008� ((234.812 - 215.303)/ 215.303)*100 =
� From 2013 to 2014� ((234.812 - 233.049)/ 233.049)*100 =
9.1%
0.75%