Chapter9: Inflation

Inflation

Increase in overall price level in the economy.

Deflation

Decrease in the price level; negative inflation.

Disinflation

Decrease in the rate of inflation.

Purchasing Power

Amount of goods purchasable with money.

Standard of Living

Quality of life based on wealth and resources.

Cost of Living

Cost necessary to maintain a certain standard.

Price Index (PI)

Measure of price changes over time.

CPI

Consumer Price Index; measures average price changes.

GDP Deflator

Measures price changes of all domestically produced goods.

PPI

Producer Price Index; measures prices producers receive.

PCE

Personal Consumption Expenditures; measures consumer spending.

BLS

Bureau of Labor Statistics; surveys consumer spending.

CPI Calculation

CPI = (Current Year Basket Cost / Base Year Cost) x 100.

Inflation Rate Calculation

Inflation Rate = [(CPI this year - CPI last year) / CPI last year] x 100.

Substitution Bias

Consumers shift to cheaper goods, CPI underestimates inflation.

New Goods Introduction

New products increase variety, affecting consumer choices.

Quality Change Measurement

Improvements in product quality affect dollar value.

CPI vs. GDP Deflator

CPI includes imports; GDP deflator includes capital goods.

Deflating Nominal Figures

Convert nominal figures to real using price index.

Real Figures

Adjusted for inflation; reflects true purchasing power.

Nominal Figures

Current dollar amounts not adjusted for inflation.

CPI Basket Composition

Typical goods consumed by American families.

Base Year

Year used for comparison in CPI calculations.

Active Learning

Engagement in exercises to apply economic concepts.

Economic Downturn

Period of reduced economic activity and deflation.

Real dollar conversion formula

Amount in year T x (CPI today/CPI year T).

Cost-Push Inflation

Results from rising per-unit input costs.

Core CPI

Excludes food and energy prices.

Real Income

Nominal income adjusted for inflation.

Nominal Income

Income not adjusted for inflation.

Real Interest Rate

Nominal rate minus inflation rate.

Inflation Premium

Compensation for anticipated inflation.

Fixed-Income Receivers

Individuals whose income does not adjust.

Indexation

Automatic adjustment for inflation.

Hyperinflation

Extremely rapid inflation, economy devastates.

Percentage Change in Real Income

Nominal income change minus price level change.

CPI Basket

Collection of goods used to calculate CPI.