1. PRINCIPLES OF ECONOMICS Chapter 22 Inflation PowerPoint Image Slideshow

2. FIGURE 22.1 This bill was worth 100 billion Zimbabwean dollars when issued in 2008. There were even bills issued with a face value of 100 trillion Zimbabwean dollars. The bills had $100,000,000,000,000 written on them. Unfortunately, they were almost worthless. At one point, 621,984,228 Zimbabwean dollars were equal to one U.S. dollar. Eventually, the country abandoned its own currency and allowed foreign currency to be used for purchases.

3. INFLATION Inflation: an increase in the overall price level. Sustained inflation: an increase in the overall price level that continues over a significant period of time.

4. MEASURING INFLATION GDP Deflator: An index that pertains to prices of all goods and services. GDP Deflator = Nominal GDP / Real GDP Overall Inflation Rate = Percentage change of the GDP Deflator

5. 5 of 25 MEASURING INFLATION Consumer Price Index (CPI): A price index computed each month by the Bureau of Labor Statistics. CPI is the weighted average of prices of a bundle of consumer goods and services (i.e., the market basket) that urban households purchase.

6. MEASURING INFLATION CPI = Cost of Current-year Market Basket Cost of Base-year Market Basket Cost of Living Inflation Rate = Percentage change of the CPI

7. COMPONENTS OF CPI

8. 8 of 25 INFLATION TRENDS The U.S. price level rose relatively little over the first half of the twentieth century but has increased more substantially in recent decades. The upward slope of the price level was especially steep in the 1970s, which reflects the high rate of inflation in that decade. Inflation during the twentieth century was highest just after World Wars I and II, and during the 1970s. Deflation, when the CPI is falling, occurred several times in the first half of the century and in 2009 as well. Inflation rates since the 1990s have been in the low single digits.

9. INFLATION TRENDS

10. This chart shows the cost of living inflation rates in the United States, the United Kingdom, Japan, and Germany.

11. 11 of 25 HYPER OR RUN-AWAY INFLATION Hyperinflation: A condition in which average prices rise at least 50% per month. To hedge against rapidly rising prices, households spend money as quickly as possible, causing inflation to further accelerate. Formation of this inflation psychology make public policy to curb inflation ineffective.

12. 12 of 25 HYPER OR RUN-AWAY INFLATION These charts show the cost of living inflation in Argentina, Brazil, China, Nigeria, and Russia. (a) Of these, Argentina, Brazil, and Russia all experienced hyperinflation at some point between the mid-1980s and mid-1990s. (b) Though not as high, China and Nigeria also had high inflation rates in the mid-1990s. Even though their inflation rates have come down over the last two decades, several of these countries continue to see significant inflation rates.

13. HYPER OR RUN-AWAY INFLATION

14. 14 of 25 HYPER OR RUN-AWAY INFLATION After adjusting for inflation, the federal minimum wage dropped more than 30% from 1967 to 2010, even though the nominal wage climbed from $1.40 to $7.25 per hour. Increases in the minimum wage in between 2008 and 2010 kept the decline from being worse—as it would have been if the wage had remained the same as it did from 1997 through 2007.

15. ADJUSTMENT FOR INFLATION

16. 16 of 25 HYPER OR RUN-AWAY INFLATION Over the last several decades in the United States, there have been times when rising inflation rates have been closely followed by lower productivity rates and lower inflation rates have corresponded to increasing productivity rates. As the graph shows, however, this correlation does not always exist.

17. INFLATION – PRODUCTIVITY ASSOCIATION