Principles of economics openstax chapter22

College
Principles
ofPhysics
Economics
Chapter
# Chapter
Title
Chapter
22 Inflation
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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.


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.


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


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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.


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


COMPONENTS OF CPI


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.

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INFLATION TRENDS


INFLATION TRENDS


INFLATION TRENDS

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


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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.


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.

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HYPER OR RUN-AWAY INFLATION


HYPER OR RUN-AWAY INFLATION

College Physics
Chapter # Chapter Title
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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.

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HYPER OR RUN-AWAY INFLATION


ADJUSTMENT FOR 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.

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HYPER OR RUN-AWAY INFLATION


Inflation – productivity association