1. Inflation
Part II…

2. GDP Deflator Nominal- absolute dollars
Purpose: Converts Nominal GDP into Real GDP
Nominal- absolute dollars
Real- inflation adjusted dollars
Real also called “Constant Dollars “
Only Real GDP reflects true quantity of goods/services

3. GDP Deflator vs. CPI
2 important differences often cause them to diverge
GDP deflator reflects prices of all goods/services produced domestically
broader index
CPI index reflects prices of a market basket of goods/services bought by consumers
includes international goods
Narrow index

4. X 100 GDP Deflator = Example: 2004 10 $100 $10 2005 12 $150 $18
Year Qty Px Nominal GDP
$ $10
$150 $18
$200 $28
Nominal GDP
Real GDP
X 100
GDP Deflator =
Year GDP Deflator
($10/10) X = 100
($18/12) X = 150
($28/14) X = 200
Base Year will
Always be 100
Real GDP = Nominal GDP X
(2004 dollars) Price Index
$28/200 * 100 = $14

5. Two Measures of Inflation
Percent
per Year 15
Oil Spikes
raises CPI more
than GDP
Deflator
CPI 10
GDP deflator 5
1965
1970
1975
1980
1985
1990
1995
2000
2005

6. Inflation: Expected vs. Unexpected
Unexpected or sudden inflation is what really creates winners & losers in our economy
In theory, as long as actual inflation is predictable (i.e. = expected inflation), workers, employers, savers, lenders & borrowers have time to adjust & plan for it. (less harmful) ?
Expected
Inflation
Actual
Inflation

7. Who is Hurt by Unexpected Inflation?
People on a fixed income
Minimum wage workers
Savers

8. Who is Helped by inflation?
People in large amount of Debt
Fixed interest rates on Mortgages, Car Loans, Student Loans

9. 2-Types of Inflation Demand-Pull Inflation: Cost-Push Inflation
Too many dollars chasing too few goods
Spending increases faster than production
Demand Side Inflation
Cost-Push Inflation
Increase in cost of any factors of production (input prices)
examples: price of oil, labor, steel, etc….)
Supply Side Inflation

10. Inflation Worksheet