the effects of inflation and deflation on different groups
TRANSCRIPT
the effects of inflation and deflation on different groups
Scary!• The dollar has lost 56% of it’s value
since 1992.
• Or, a dollar today will buy the same amount of stuff as $0.64 would buy in 1992.
What has happened t the value of our money?
From year to year, a dollar then vs. a dollar now.
Inflation
• Inflation: P , $ value
• Deflation: P , $ value
• Stagflation: recession + inflation at same time.
• For the last 50 years, the U.S. has had an avg. inflation rate of 4% /yr.
So let’s say
• You get a raise of 5% this year.
• But inflation was 5% this year.
• Your nominal pay rose.
• What happened to your PURCHASING POWER???
• IT STAYED THE SAME
Stories of extreme inflation
Note those who are helped, and those who are hurt.
Story Time
• Once upon a time in Burgerland…
• There were only four jobs:– Beefers (cowboys)– Bakers– Burger store managers– Bankers
• And only one product…
• BURGERS.
For as long as anyone can remember…
• The price of a burger has been $1.
• All of the burger joints voluntarily charge $1.
Bill the baker wants to expand his business
• So he borrows – $10 from Brenda the banker, – at 20% simple interest (fixed rate),– to be paid back in one year.
• That’s $12!• What is Brenda’s profit?• How many burgers will Brenda be able to buy
with her profits?• (All of the burger joints voluntarily charge $1.)
But, before Bill is due to pay Brenda…
• The burger store managers (Bruce, Belinda, Barry, and Bedelia) unexpectedly raise their prices from $1 to $2 a burger!!
• Who is hurt by this change of events?• Who is helped?• How could Brenda have kept from getting
hurt?
If Brenda had charged• 20% interest• PLUS• the rate of inflation (called an adjustable
rate loan)
• She would have come out better.• Prices doubled. That’s 100% inflation.• A loan of $10, paid back plus 120% interest
would be $22
Unexpected Inflation
• Hurts:–lenders at fixed rates
–savers at fixed rates
–fixed-income recipients
• Benefits:–borrowers at fixed rates
Reminders/Hints
• A bond is a loan.– If I buy a bond from Coca-Cola, I’m loaning them
$.– They sold me a bond, so they’re borrowing from
me.
• Dividends are profits paid to stockholders. When prices rise, dividends rise.
• Income tax is a percentage of your income.– When prices rise, incomes rise.
Causes of Inflation
• Increase in money supply (MV=PQ)
• War
• More demand
Constructing a Price Index
• Inflation can distort GDP from year to year.
• A price index measures P changes.
• Select goods & services for a “market basket.”
• Add the price of each of these goods, to get the “base-year market basket price.”
• Find the market basket price at regular intervals (monthly, yearly, etc.).
Math Review
• Percent Change
• the formula: [(new-old)/old] X 100
• so if something increases from 5 to 7, the percent change is
• [(7-5)/5] = 0.4 = 40%
Constructing a Price Index-Continued• Price index =
• (selected basket price/ base yr. basket price)X100
• The base-year price index always = 100!
• Inflation =
• % change in price index, [(new-
old)/old]
Inflation between ‘84 & ‘98:
(163-100)/100 = 0.63 = 63%
Inflation between ‘98 & ‘03:
(183.7-163)/163=0.13=13%
Prices in 1999 Prices in 2009• Peanut butter (lb.)- $1.77
• White flour (lb.)- $0.30
• White bread (lb.)- $0.87
• Chocolate chip Cookies (lb.)- $2.61
• Ground beef (lb.)- $1.38
• Pork chops, center cut, bone-in, per lb.- $2.95
• Bologna, all beef or mixed, per lb.- $2.41
• Chicken breast, bone-in, per lb.- $2.07
• Cheddar cheese, natural, per lb.- $3.75
• Apples, red delicious, per lb.- $0.86
• Bananas, per lb.- $0.49
• Tomatoes, per lb.- $1.90
• Lettuce, iceberg, per lb.- $0.65
• Beans, dried, any type, all sizes, per lb.- $0.69
• Coffee, 100%, ground roast, all sizes, per lb.- $3.44
• Average electric bill per month- $84
• Gasoline, unleaded, per gallon/3.785 liters- $0.97
• Movie ticket- $5.06
• US postage stamp- $0.33
• Bacon (lb.)- $2.59
• Dozen eggs- $0.89
• Average rent/housing payment per month- $645.00
• Peanut butter (lb.)- $2.14
• White flour (lb.)- $0.52
• White bread (lb.)- $1.38
• Chocolate chip Cookies (lb.)- $3.11
• Ground beef (lb.)- $2.36
• Pork chops, center cut, bone-in, per lb.- $3.39
• Bologna, all beef or mixed, per lb.- $3.11
• Chicken breast, bone-in, per lb.- $2.46
• Cheddar cheese, natural, per lb.- $5.01
• Apples, red delicious, per lb.- $1.23
• Bananas, per lb.- $0.63
• Tomatoes, per lb.- $1.66
• Lettuce, iceberg, per lb.- $0.94
• Beans, dried, any type, all sizes, per lb.- $1.40
• Coffee, 100%, ground roast, all sizes, per lb.- $3.68
• Average electric bill per month- $126
• Gasoline, unleaded, per gallon/3.785 liters- $1.79
• Movie ticket- $7.50
• US postage stamp- $0.42
• Bacon (lb.)- $3.22
• Dozen eggs- $1.37
• Average rent/housing payment per month- $780.00
Major Price Indexes
• Consumer Price Index (CPI)-90,000 items in 364 categories.
• Implicit GDP Price Deflator- all goods/services. Base year 1996.
Does Government Spending affect the CPI???
• Lets take a look at Government Debt and deficits and see if we see a
correlation.
I. Real GDP• GDP adjusted for inflation.
• Real GDP=• [GDP from year Y/(price index from year Y)]X100
• This formula sets dollars equal to base year.
I. Real GDP• Listen:
• If GDP in 2003 was $10.6 trillion, and the GDP deflator was 111.9, what was the Real GDP?
• [$10.6 trillion/111.9]X100= $9.5 trillion
• $9.5 trillion is 2003 GDP measured in 1996 prices.
Causes of Inflation
• Demand-pull inflation• Cost-push inflation -
during stagflation• Growth in money supply.• Wage-price spiral - higher
Ps, then higher wages, then higher Ps...
Inflationland• In Inflationland, they have inflation at the
relatively high rate of 7% a year.• The inflation rate is always 7%.• Banks expect inflation to stay at 7%, and
make decisions accordingly.• Businesses give all workers a 7% raise every
year.• The government raises taxes 7% every year.• Who does inflation hurt in this country????
The oil crisis of 1973 caused stagflation. High oil prices caused a recession and inflation at the same time.
High inflation + falling real GDP = STAGFLATION
Questions?