Inflation_Y4.pptx

A low and stable rate of inflation Inflation, Deflation and Disinflation It is defined as the sustained increase in the general Inflation price level or average price level of goods and services in a country over a period, usually a year...

A low and stable rate of inflation Inflation, Deflation and Disinflation It is defined as the sustained increase in the general Inflation price level or average price level of goods and services in a country over a period, usually a year (lower purchasing power) It is defined as the sustained decrease in general price Deflation level or average price level of goods and services in a country over a period, usually a year (higher purchasing power) Disinflation It refers to a decrease in the rate of inflation (a decrease in the inflation rate) Distinguishing between inflation and rate of inflation Inflation refers to an increase in price but a change in rate of inflation refers to a change in how fast the price level is rising If price level increases by 5% in one year, then increases by 5% in the next If price level increases by 5% in one year, this means there is no change in year, then increases by 7% in the next the rate of inflation, although there is an. year, this represents an increase in the increase in general price level (of 5%) in rate of inflation. both years If price level increased by 10% in one year and 7% the next, this represents a decrease in the rate of inflation (disinflation). Is there an increase in general price level in this case? MEASUREMENT OF INFLATION & DEFLATION 1) UNDERSTANDING PRICE INDEX 2) CALCULATING CONSUMER PRICE INDEX 3) CALCULATING INFLATION RATE Table 1: Price of a loaf of bread Year 2007 2008 2009 2010 Price 1.25 1.30 1.40 1.00 ($) Can you tell how much prices have increased or decreased at one glance? 8 Table 1: Price of a loaf of bread Year 2007 2008 2009 2010 Price 12527 13012 14014 10036 ($) 8 5 7 7 Can you tell how much prices have increased or decreased at one glance? 9  Index Numbers and Price Index Use index numbers when making comparisons over time An index starts in a given year (base year), and is given an index number of 100 When there is a positive change, the index number will increase to above 100 When there is a negative change, the index number will fall to below 100  Index Numbers and Price Index An index number of 102 means a 2% increase from the base year An index number of 97 means a 3% decrease from the base year. Any data that is expressed over time can be converted into an index number. Prices of goods and services is one example of data which economists convert to index number.  How to construct a Price Index? 1. Establish a base year 2. Divide each year’s price by the price in the base year, then multiply it by 100 Year 2007 is the base Table 1: Price of a loaf of bread (2007 = year 100) Year 2007 2011 2012 2013 Price ($) 1.25 1.30 1.40 1.0012  Calculating Price Index Q1. Assuming that 2007 is the base year, calculate the price index of the loaf of bread from 2007 to 2013. Table 1: Price of a loaf of bread (2007 = 100) Year 2007 2011 2012 2013 Price ($) 1.25 1.30 1.40 1.00 10 Price 0 Base Year, hence a Index price index of 100 is  How to construct a Price Index? 1. Establish a base year 2. Divide each year’s price by the price in the base year, then multiply it by 100 Table 1: Price of a loaf of bread (2007 = 100) d i c a t e N O T in x do e s N O T Year 2007 in d e 2011 doe s 2012 2013 Price i c es a n d i t Price ($)t u a l p r 1.25 1.30 1.40 1.00 a c n i t s e a n y u Priceha v 100 104 112 80 14  Q2 Table 1: Price of a loaf of bread (2007 = 100) Year 2007 2011 2012 2013 Price ($) 1.25 1.30 1.40 1.00 Price 100 104 112 80 Index Between 2007 and 2012, the percentage change in the price of a loaf of bread is Or 112- 100 = 12 ∴ The price has increased by 12% 15  Q3 Table 1: Price of a loaf of bread (2007 = 100) Year 2007 2011 2012 2013 Price ($) 1.25 1.30 1.40 1.00 Price 100 104 112 80 Index Between 2007 and 2013, the percentage change in the price of a loaf of bread is ∴ The price has decreased by 20% 16  Q4 Table 1: Price of a loaf of bread (2007 = 100) Year 2007 2011 2012 2013 Price ($) 1.25 1.30 1.40 nly 1.00 CP I i s o t i n o104of r Price 100 b tur a c 112 e s y ea 80 c t s o b a Dire Consider Index if m this p a redist Base Year in qn is l i d i f c o a v correct: 2011. % Δ in price btn 2011 & CPI base year is 2012 2007. 17  Activity 2 Q4 Table 1: Price of a loaf of bread (2007 = 100) Year 2007 2011 2012 2013 Price ($) 1.25 1.30 1.40 1.00 Price 100 104 112 80 Index % Δ in price btn 2011 & 2012 =Inflation rate = (CPI - CPI ) /CPI x (100) 2 1 1 ∴ The price has increased by 18  Learning Points When price index is greater than the base year (>100), it means that prices have increased When price index is smaller than the base year (