Presentation is loading. Please wait.

Presentation is loading. Please wait.

Inflation. General terms DEFLATION = opposite to inflation, occurs when the general level of prices is falling DISINFLATION = describe the process of.

Similar presentations


Presentation on theme: "Inflation. General terms DEFLATION = opposite to inflation, occurs when the general level of prices is falling DISINFLATION = describe the process of."— Presentation transcript:

1 Inflation

2 General terms DEFLATION = opposite to inflation, occurs when the general level of prices is falling DISINFLATION = describe the process of reducing a nation’s rate of inflation STAGFLATION = high inflation in periods of high unemployment REVALFLATION = impact of inflation, where the result is an inner valorisation of exchange rate Rate of inflation

3 PRICE INDEXES Consumer price index (CPI) - each item is assigned a fixed weight proportional to its relative importance in consumer expenditure budget Producer price index (PPI) - measures the level of prices at the wholesale or producer stage GDP deflator – the ratio of nominal GDP to real GDP  can be interpreted as a comprehensive price index

4 Numerical Example Calculate the consumer price index and the rate of inflation for 2006. Base year (2000) Weigh (%) Price 2006 Weigh(%) Price Food2010020102 Shelter5010050106 Medical care 3010030110

5 Categories of Inflation according to its pace/rate: MODERATE INFLATION – occurs when prices are rising slowly (we might classify this as single-digit annual inflation rates  0-10 % per year) GALLOPING INFLATION - occurs when prices start rising at double-or-triple digit rates (20, 100 % a year) HYPERINFLATION – the extraordinary price increase (at annual rate of 100 % or more prevailing in a nation for at least one year)

6 Inflation according to: a) its impact on individual commodity: Balanced – leaves relative prices unchanged  all prices are rising at the same percentage point each year  it doesn’t cause a change in consumption structure Unbalanced – some prices are increasing faster than the general price level  there can be seen an expressive impact on the demand and consumption structure b) predictability Anticipated Unanticipated Inertial inflation = tends to stay at its prior rate until shocked by economic events.

7 IMPACT OF INFLATION „cost of inflation“ 1) Redistribution of income and wealth 2) Social impacts 3) Impact on balance of economy

8 SUMMARY OF IMPACTS  there is no effect on real output, efficiency, or income distribution of an inflation that is both balanced and anticipated  generally, the economic impact of an unanticipated moderate inflation is mainly on the distribution of income and wealth, and less on the efficiency of the system  the mildest impact will be found when inflation is at a low rate – small, anticipated and balanced  major social and economic impacts arise for galloping inflation or hyperinflation

9 Causes of Inflations 1.DEMAND-PULL INFLATION - the essence of demand- pull inflation is too much spending beating against a limited supply 2. COST-PUSH INFLATION - first appeared during the 1930’s and the 1940’s - inflation caused by continual decrease in aggregate supply

10 THE PHILLIPS CURVE the Phillips curve depicts the relationship between unemployment and inflation, both in percent SHORT-RUN PHILLIPS CURVE a nation could buy a lower level of unemployment if it were willing to pay the price of a higher rate of inflation

11 The shifting Phillips curve „Boom cycle“ Period 1: unemployment is at the natural rate; no demand or supply surprises; economy is on the lower short-run Phillips curve Period 2: rapid increase in output during an economic expansion (f. e. as a result of expansion policy) lowers the unemployment rate  wages and prices begin to accelerate  the economy moves up and to the left along the short run PC Period 3: Firms and workers begin to expect higher inflation  higher expected rate of inflation gets incorporated into wage and price decisions  the short-run PC shifts upward Period 4: unemployment rate returns to the natural rate; contraction in economic activity brings output back to its potential.

12 The vertical Long-Run Phillips curve When the unemployment rate diverges from the NRU the inflation tends to change According to the natural rate theory, the only level of unemployment consistent with a stable inflation rate is the natural rate of unemployment the long-run PC is a vertical line rising straight up at the NRU

13 Two important implications for economic policy: 1) there is a minimum level of unemployment that an economy can sustain in the long run; 2) the nation can temporarily enjoy low rate of unemployment, but at the expense of rising inflation WAYS (COSTS) OF DISINFLATION: Temporary increase in unemployment above the NRU Income policies (wage- price control or voluntary guidelines)

14 1. Calculate the CPI and IPD, if following amount of products was consumed in economy: Product1.Year2. Year PriceQuantityPriceQuantity A16120 00021142 000 B82031 00081533 100 C3 6002904 050270


Download ppt "Inflation. General terms DEFLATION = opposite to inflation, occurs when the general level of prices is falling DISINFLATION = describe the process of."

Similar presentations


Ads by Google