Post on 24-Dec-2015
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Warm UpWarm Up
How are real & nominal GDP different?
What equation connects them?
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Chapter 24: Measuring the Cost of Living
Chapter 24: Measuring the Cost of Living
It sure adds up quickly!
It sure adds up quickly!
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OverviewOverview
CPI COLAS Real vs nominal interest rates
Vocab is the same list
15 slides
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Backwards firstBackwards first
Last chapter we introduced GDPReal vs nominalGNP, NDP, PI, NI, DI, NEWIncome & expenditure approach
It’s great to know the total, but what does it cost us?
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Rising SunRising Sun
Prices increasing is almost as consistent as the sun
Some more than othersSometimes it’s DEFLATIONDISINFLATION & HYPERINFLATIONAlso galloping & moderateBottom line is that prices increase
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Making sense of cents
Making sense of cents
It’s a mess to keep straightMost rise, a few fallWhat’s it mean overall?Analyze everything together
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CPICPI
Take a big “market basket” Add up the cost Do it every month forever Use tallies to evaluate inflation
Tells us overall how much prices are changing for the average consumer
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3 step Process3 step Process
1. Set the “MARKET BASKET” 2. Find the prices 3. Compute cost for basket 4. Set a base year
Analyze inflation over that period
5. Calculate CPI Equation?
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Others care tooOthers care too
It’s not the only one…It is the most commonly usedPPIWhole purpose is to track prices
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Wha’t it used for?Wha’t it used for?
It’s great to knowServe a real purpose?Who uses it?Best tool gov’t has for checking burden on “average” consumer
Often times COLA based on it
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Now & LaterNow & Later
Inflation affects your money now
Also reduces value later$5 used to buy a lot$.49 cheeseburgers at McDees$.39 tacos on Sunday
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Banks aren’t losers
Banks aren’t losers
Banks must consider thisMoney loaned out is worth less when repaid
Add expected inflation onto price charged for loan (interest rate)
The rate you pay now (nominal) = expected inflation +real IR
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Can’t expect the unexpected
Can’t expect the unexpected
Banks consider “EXPECTED INFLATION”
What if it’s not expected?Who suffers?
Who benefits?
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Use in moderationUse in moderation
So far it sounds like inflation is all bad
No really, but can be when not controlled
Moderate is ok (ideally 2-3%)When we have time to adjust it’s all good (gas of late)
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SummarySummary
Prices go up…it’s inevitable Price indices used to estimate burden to consumers
CPI most popular (relevant) Directly affects interest rates (nominal = real + inflation)
HW: Questions for Review (p 532): 1, 4 Problems & Aps (p 532): 2, 3, 5, 6, 11