Econ 201 Week 11 (Inflation, GDP)
Econ 201 Week 11 (Inflation, GDP) ECON 201
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This 3 page Class Notes was uploaded by Ekene Tharpe on Tuesday March 15, 2016. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Donna Bueckman in Fall 2015. Since its upload, it has received 68 views. For similar materials see Intro Economics: Survey Course in Economcs at University of Tennessee - Knoxville.
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Date Created: 03/15/16
Econ 201 Notes: Week 10 CPI Use: 1. Indexation: a. Automatic correction of inflation by contract or laws i. COLA (cost of living allowances/adjustments) in multi year labor contracts ii. Adjustments in federal income tax bracket and social security payments 2. Compare Price Over Time: Amount in “today’s” dollars a. CPI can adjust figures (costs) so they can be compared over time i. Amount in Amount in T CPI (Price level) “today” “today’s” dollars dollars CPI in year T Example: Comparing price (GAS PRICES) YEAR COST PER GAL CPI 1981 $1.42 88.5 2005 $2.50 196.4 1981 cost of gas in 2005 (“today’s”) dollars: = $1.42 X (196.4 / 88.5) 3. Real vs. Nominal Interest Rates: a. Nominal Interest Rate: i. Interest NOT corrected for inflation ii. Rate of growth measured in Face(dollar) value of a deposit or debt b. Real Interest Rate i. Corrected for inflation ii. Rate of growth in measured in purchasing power of a deposit or debt Real Interest Rate Nominal Interest Rate Inflation Rate Example: $1000 Deposit for 1 Year: • Nominal Interest Rate= 9% ($90 by the end of the year • Inflation+ 3.5% during that year • Real Interest Rate o =(Nominal interest rate)-‐(Inflation rate) o 9% -‐ 3.5% = 5.5% *Purchasing Power for $1000 deposit has had 5.5% ($55) growth! CPI Limits: 1. Issue Measuring Cost of Living a. Substitution bias: prices change, we change b. However, the Basket’s fixed: doesn’t catch all the changes 2. New Good Introduced a. Not included in CPI since new b. Quality change not measured i. “New and Improved” = higher prices (price change cant be measured by CPI) CPI Limit Effects: • Inflation is overstated o BLS adjustments can be made ⋅ CPI still overstate inflation by Social Security per year • Payment indexed to CPI (what’s happening trend wise) o Social Security o COLA’s Cost of Inflation: “Inflation erodes real incomes”= FALSE • Inflation: the general increase in prices of things people wish to buy/sell o Cause CPI and nominal wages to increase together over long term The Cost: • Misallocation of resources create relative price variability o Not all prices rise at the same time “blurred price signals” • Inconvenience and inconvenience o Inflation alters “yardstick”(Unit of Account), thus complicating: ⋅ Planning long range ⋅ Comparing dollar amounts over time Hyperinflation: • Inflation passing 50% per month o Gov’t prints too much money: chasing same goods, prices increase • Excessive growth in suppliers money o Always cause hyperinflation • Hyperinflation meets Zimbabwe o Large quantities of money created due to large gov’t budget deflects o Increased inflation rate: 231 million% Other Inflation Measurements: Bureau Labor Stats: • Producer Price Index (PPI) • International Price Index The ‘best’ measure of inflation for a • Employment Cost Index given application depends on the • GDP deflator intended use of the data • Core Inflation Index Deflation: • Downward pressure on price, not all bad • However o Low output (economic growth) = Low employment § Affects buyers, slows purchasing o Increases value of debt = Increase burden § Private and private debt § Lending slows o Create negative interest rates * The FED has inflation target of 2% per year: Maintains price stability, keeps people working Gross Domestic Product (GDP): Income expenditure The market value of all finial goods and services produced within a country in a given period of time • Market Value: goods are valued at their market prices o Same units, like U.S dollars o Excluded if no market value • Finial Goods: for the end user o Intermediate goods used to produce other goods § Avoid double counting • Goods and Services: GPD provide tangible goods and intangible services • Produced: Not including goods produced in the past, only what’s currently produced o “Produced,” not consumed • Within a Countries Boarders o By citizens or foreigners • In a given period of time o Usually a year or a quarter (3 months)
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