ppt chapter 26 yeni

5/27/2018 PPT Chapter 26 Yeni

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The McGraw-Hill Companies, 2008

Chapter 26Inflation, expectations and

credibility

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,9th Edition, McGraw-Hill Education, 2008

PowerPoint presentation by Alex Tackie and Damian Ward


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Inflation is ...

Inflation is a rise in the price level.

Pureinflation is when goods andinput

prices rise at the same rate. One of the first acts of the Labour

government in 1997 was to make theBank of England independent with a

mandate to achieve low inflation.The rental contracts and the civil servant wages

are indexed to inflation in Turkey.


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Some questions about inflation

What are the causes of inflation?

What are the effects and hence costs

of inflation?

What can be done about it?

These are the questions we seek to

answer in what follows.


4/31The McGraw-Hill Companies, 2008

Calculating Inflation

We use price indices to measure

inflation.

Consumer Price Index (CPI) Producer Price Index (PPI)

Gross Domestic Product deflator

(GDP deflator)



Inflation in the UK, 1950-2007

0

5

10

15

20

25

30

1950

1960

1970

1980

1990

2000

%p.a.

Source: Economic Trends Annual Supplement, Labour Market Trends



Inflation in Turkey2003-2011

6Source: TEPAV

0

2

4

6

8

10

12

14

16

18

20

2003 2004 2005 2006 2007 2008 2009 2010 2011

Inflation



THE CONSUMER PRICEINDEX

The consumer price index (CPI) is ameasure of the overall cost of thegoods and services bought by a

typical consumer.

The Bureau of Labor Statisticsreports the CPI each month.

It is used to monitor changes in thecost of living over time.



THE CONSUMER PRICEINDEX

When the CPI rises, the typical familyhas to spend more dollars tomaintain the same standard of living.



How the Consumer Price Index IsCalculated

Fix the Basket:Determine whatprices are most important to thetypical consumer.

The Bureau of Labor Statistics (BLS)identifies a market basket of goods andservices the typical consumer buys.

The BLS conducts monthly consumersurveys to set the weights for the pricesof those goods and services.




Find the Prices:Find the prices ofeach of the goods and services in thebasket for each point in time.




Compute the Baskets Cost:Usethe data on prices to calculate thecost of the basket of goods and

services at different times.




Choose a Base Year and Computethe Index:

Designate one year as the base year,making it the benchmark against whichother years are compared.

Compute the index by dividing the price

of the basket in one year by the price inthe base year and multiplying by 100.




Compute the inflation rate:Theinflation rate is the percentagechange in the price index from the

preceding period.




The Inflation RateThe inflation rate is calculated as

follows:

Inflation Rate in Year 2 =CPI in Year 2 -CPI in Year 1

CPI in Year 1100



Table 1 Calculating the Consumer Price Indexand the Inflation Rate: An Example

Copyright2004 South-Western





bl l l i h i d



CPI 851 goods and services

included in 12 main categories. CPI-Turkey 2012 (%)

1. Food and nonalcoholic beverages 26,222. Alcoholic beverages and tobacco 5,213. Clothing and shoes 6,87

4. Housing 16,445. House appliances 7,456. Health 2,297. Education 2,188. Communication 4,69. Transportation 16,73

10.Recreation and culture 2,9811.Restaurants and Hotels 5,6312.Other 3,4

TOTAL 100

Source: TK


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The GDP Deflator

The GDP deflator is a measure of theprice level calculated as the ratio ofnominal GDP to real GDP times 100.

It tells us the rise in nominal GDPthat is attributable to a rise in pricesrather than a rise in the quantities

produced.


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The GDP Deflator

The GDP deflator is calculated asfollows:

GDP deflator =

Nominal GDP

Real GDP100


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The Causes of Inflation

Demand-Pull Inflation: Increaseswhen the demand increases.

Example: Good economic conditionscause demand to increase.

Cost-Push Inflation: The increase incosts can push the prices up.


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Hyperinflation

Hyperinflations are periods wheninflation rates are very large

During such periods there tends to be aflight from cash, i.e. people hold aslittle cash as possible e.g. Germany in 1922-23, Hungary 1945-

46, Brazil in the late 1980s.

Large government budget deficits helpto explain such periods persistent inflation must be accompanied by

continuing money supply growth

i fl i


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German Hyperinflation,1922-23

(January 1922=1)Date Money

SupplyPrices Real Money Monthly

inflation(%)

Jan 1922 1 1 1.00 5

Jan 1923 16 75 0.21 189

July 1923 354 2021 0.18 386

Sept. 1923 227777 645946 0.35 2532

Oct. 1923 20201256 191891890 0.11 29720

25


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Seigniorage and InflationTax

Seigniorage: The real income that thegovernment gets by printing money

Inflation Tax: The decrease in realnational debt because of the increase ininflation.


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Inflation illusion

People have inflation illusion when theyconfuse nominal and real changes.

Welfare depends upon real variables, not

nominal variables. If all nominal variables (prices and

incomes) increase at the same rate, realincome does not change.


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The costs of inflation (1)

Fully anticipated inflation: Institutions adapt to known inflation:

nominal interest rates

tax rates transfer payments

there is no inflation illusion

Some costs remain:

shoe-leather people economise on money holdings menu costs

firms need to alter price lists etc.


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The costs of inflation (2)

Even if inflation is fully anticipated,the economy may not fully adapt

interest rates may not fully reflectinflation

taxes may become distorted fiscal drag may have unintended effects on

tax liabilities capital and profits taxes may be distorted


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The costs of unanticipatedinflation

Unintended redistribution of income from lenders to borrowers

from private to public sector

from old to young Uncertainty

firms find planning more difficult underinflation, which may discourage investment

This has been seen as the mostimportant cost of inflation


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Defeating inflation

Monetary policy: Inflation will be lower ifthe rate of money growth is lower.

Fiscal Policy: If the government spends

less, then it needs to print less money tocover its debt.

Price policy: The government tries to

control the prices. (e.g. Limit the raise inrental contracts).

ppt chapter 26 yeni

Documents

mcgrawhill companies

damian ward5272018 ppt

consumer priceindex

thetypical consumer

atypical consumer

low inflation

calculating inflation

causes of inflation