Bell work: FreyonomyPay yourself and pay your Mon/Tues bills

InflationStandard 5 Notes Part I

Inflation

Inflation- a sustained rise in the level of prices generally or a sustained decrease in purchasing power.

What causes inflation?

Demand-pull inflation- results when total demand rises faster than the production of goods and services

"more money chasing the same amount of goods.“

What causes inflation? Cost-push inflation- results when

increases in the costs of production push up prices.◦ Inputs like labor, land, capital, and

management◦ Wage-price spiral- a cycle that

begins with increased wages, which lead to higher production costs, which in turn result in higher prices, which result in demands for higher wages.

Cost-push Inflation

What is the impact of inflation?

Decreasing Value of the Dollar◦ people on fixed incomes are hit hard. They do not receive wage increases. ◦ EX: People on social security

Increasing Interest Rates◦ borrowing money becomes more expensive to keep up with the rate of

inflation. Credit card payments rise. Consumers buy less items that require borrowing like houses and cars.

◦ Ex. Fred wants to buy a car valued at $10,000 Fred saved up for a plan where the interest rate is 5% ($188 a month) Inflation caused interest rates to increase to 10% (now $212 a month) Over his 5 yr loan period, Fred will end up paying over $1,425 more for his loan

at the higher rate

Decreasing Real Returns on Savings◦ if the inflation rate is higher than your interest rate in your savings account

or bond, you can lose money that you are trying to save.

InflationHow is it measured?

◦ Consumer Price Index (CPI)- a measure of changes in the prices of goods and services commonly purchased by consumers.

◦ Producer Price Index (PPI)- a measure of change in wholesale prices

◦ Inflation Rate- the rate of change in prices over a set period of time.

Types of InflationCreeping inflation- small rate of inflation

over a long period of timeGalloping Inflation- a rapid increase in price

levelHyperinflation- a rapid, uncontrolled rate of

inflation in excess of 50% per monthDeflation-a decrease in the in the general

price level

Deflation

GDP

Standard 5

Reading Check

• GDP= (Gross Domestic Product)– Market value of all final G/S produced within

a nation in a given time period

Reading Check

• Final Good– t-shirt

• Intermediate good– fabric used to make a t-shirt

• Which (final or intermediate) is not included in the GDP?– Intermediate

Reading Check• Nonmarket activities are not included in the GDP because

they are services that people don’t charge for. – performing one’s own home repairs– Homemaker’s cooking, cleaning, and childcare

• Underground economy- because the activities are illegal, and thus unreported to the government– illegal- drug dealing– plumber who works for cash (not reported on his taxes)

• Quality of Life (GDP does not show how G/S are distributed- US highest GDP, but 10%+ of Americans live in poverty)

Challenge Question

• If you get paid in cash to baby-sit, mow lawns, or do other chores for neighbors, are you part of the underground economy or non market activities?

• Underground economy- if you don’t claim the money you made on your taxes

Calculating GDP: C+I+G+X=GDP (C) Consumption = household spending on consumer goods and services

+ (I) Investment = spending by firms and households on new capital such as factories, tools, inventory increases or decreases, and new houses

+ (G) Government Spending = government spending on public goods and services

+ (X) Net Exports = foreign trade (exports are added to GDP and imports are subtracted)

GDP Growth/Reduction

• When GDP is growing– an economy creates more jobs and more business

opportunities

• When GDP declines– jobs and more business opportunities become

less plentiful

2 Types:

• Nominal GDP- stated in the price levels for the year in which the GDP was measured

• Real GDP- nominal GDP adjusted inflation (for changes in prices)– (Nominal GDP Growth Rate % - Inflation Rate % = Real GDP Growth Rate %)

Bell work Freyonomy

1. Pay your Wednesday/ Thursday bills

Marriage?

Benefit= can split the mortgage bill with someone else

Cost= have to pay for the wedding

• Small Wedding– $1,500– Or $125 a month

• Medium Sized Wedding– $10,000– Or $835 a month

• Large Wedding– $20,000– Or $1,670 a month

Business Cycle

• A series of periods of expanding and contracting economic activity• Four Phases:

– Expansion• A period of economic growth (an increase in a nation’s real GDP)

– Peak• The point at which GDP is highest

– Contraction• Sometimes a recession (6 months+) or depression (extended period of high

unemployment and limited business activity)– Trough

• The point at which real GDP and employment stop declining

How economic growth is measured• Real GDP per capita– Real GDP/Total Population– Reflects each person’s share of real GDP– Some people will have more money, others less– Does not measure quality of life

One way to understand business cycles is through demand and supply…

• Aggregate demand- the total amount of G/S that households, businesses, government and foreign purchases will buy at each and every price level

• Aggregate supply- the total amount of G/S that producers will provide at each and every price level

http://www.classzone.com/cz/books/econ_cnc/resources/htmls/animated_economics/ec12_anim_macroequilib.html

Aggregate Demand• Increase in aggregate

demand• Expansion phase

• Decrease in aggregate demand

• Contraction phase

Why do Business Cycles Occur?• Business decisions

• Aggregate supply increase can cause an economic expansion

• Changes in interest rates• Rise in interest rates= decrease in AD (aggregate demand)• Fall in interest rates= increase in AD

• Consumer expectations• Ways consumers feel about prices, job prospects, businesses activity

cause changes in aggregate demand

• External issues (i.e. Hurricane Katrina, oil embargo of 1973)

Business Cycles in U.S. History

• The Great Depression– Real GDP declined by about a third– Sales in some big businesses

declined by as much as 50 percent– 1 in 4 people were unemployed

• The New Deal– Government agencies created– Many Americans were put back to

work– Some trees in Eagle Creek Park

were planted during this time