Gross Domestic Product (GDP) Gross Domestic Product (GDP) Gross National Product (GNP) Gross National Product (GNP) Inflation rate Inflation rate Poverty rate Poverty rate Unemployment Unemployment Stock market Stock market Job growth rate Job growth rate National debt National debt So with the economy

Inflation

I. Definition A. a general rise in price levels as measured by the Consumer Price Index (CPI)

B. Consumer Price Index (CPI) Reports on price changes from a sample (market basket) of 90,000 goods and services from over 300 categories and compared to the base-year prices. Reports on price changes from a sample (market basket) of 90,000 goods and services from over 300 categories and compared to the base-year prices.

II. Three Rates of Inflation A. Creeping Inflation Slow rate, manageable Slow rate, manageable Single-digit inflation rates Single-digit inflation rates >10% >10%

Recent Inflation Rates

B. Galloping inflation Dangerous rates of inflation Dangerous rates of inflation Double-digit inflation rates Double-digit inflation rates 10% or more 10% or more

C. Hyperinflation Out-of-control rate of inflation; triple digits Out-of-control rate of inflation; triple digits 50% inflation rate per month 50% inflation rate per month 600%+ 600%+

1967: a dollar from Brazil was worth one one-trillionth of one US cent in 1994 dollars 1967: a dollar from Brazil was worth one one-trillionth of one US cent in 1994 dollars World’s record on hyperinflation: World’s record on hyperinflation: Hungary in 1946 when hyperinflation doubled prices every 13.5 hours Hungary in 1946 when hyperinflation doubled prices every 13.5 hours 2 nd place: 2 nd place: Zimbabwe, 2008 Zimbabwe, ,000 dollar bill so worthless, was used as toilet paper 1,000 dollar bill so worthless, was used as toilet paper Annual inflation rate: 516 quintillion percent (516,000,000,000,000,000,000%). Annual inflation rate: 516 quintillion percent (516,000,000,000,000,000,000%). The monthly inflation was 13.2 billion percent The monthly inflation was 13.2 billion percent

Room service menu at the Holiday Inn in Bulawayo, Zimbabwe

III. Causes 1. Demand-pull theory Demand in all sectors of the economy exceeds supply  shortage  price increases (prices pulled up due to excessive demand) Demand in all sectors of the economy exceeds supply  shortage  price increases (prices pulled up due to excessive demand) S D Q P D2

2. Deficit Spending (govt. spending more than it “makes”) Same as demand-pull, but cause of excessive demand blamed on government’s deficit spending Same as demand-pull, but cause of excessive demand blamed on government’s deficit spending $14 trillion now!

3. Rising costs of inputs (Cost-pull) labor labor Union  higher wages  higher costs of production  higher prices to cover higher costs Union  higher wages  higher costs of production  higher prices to cover higher costs products products 1970’s: oil price per barrel increased 600% 1970’s: oil price per barrel increased 600%

4. Wage-price spiral No single group to blame. Self-perpetuating spiral of wages and prices feed off each other. No single group to blame. Self-perpetuating spiral of wages and prices feed off each other. higher prices  higher wages  higher costs  higher prices  higher wages  etc… higher prices  higher wages  higher costs  higher prices  higher wages  etc…

5. Excessive monetary growth Money supply exceeds the dollar value of all goods and services within the economy (real GDP). Excess money in the economy creates a demand-pull effect Money supply exceeds the dollar value of all goods and services within the economy (real GDP). Excess money in the economy creates a demand-pull effect

IV. Consequence of Inflation 1. Dollar buys less People on fixed incomes hurt most by inflation People on fixed incomes hurt most by inflation 1974 one scoop of ice cream: == $1 buys 20 single-scoop ice cream cones at Thrifty’s Today? == $1 buys 1 scoop at Right Aid

2. Spending habits change Buy fewer “big-ticket” items (expensive items) Buy fewer “big-ticket” items (expensive items)

3. Risky investments As prices increase, some take advantage of rising prices of gems, artwork, etc. Prices expected to continue rising in hopes of buying low, selling high for a profit As prices increase, some take advantage of rising prices of gems, artwork, etc. Prices expected to continue rising in hopes of buying low, selling high for a profit

4. Change in income distribution Debtors pay debts with inflated dollars which have less purchasing power than when they borrowed them Debtors pay debts with inflated dollars which have less purchasing power than when they borrowed them WHAT?! WHAT?!

Questions 1. Describe the demand-pull theory of inflation 2. Who is most hurt by inflation? 3. Who is responsible for inflation when deficit spending is to blame? 4. What type of products lose demand most under inflationary conditions? 5. What effect does inflation have on the dollar? 6. How do higher oil prices affect inflation? 7. What rate of inflation would an inflation rate of 2.8% be?