Real Gdp Inflation Spring 2007 Section 1

8/7/2019 Real Gdp Inflation Spring 2007 Section 1

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Real GDP andReal GDP andInflationInflation


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Gross Domestic Product (GDP)Gross Domestic Product (GDP)

GDP = C + G + I + NX GDP = C + G + I + NX C = consumer spending C = consumer spending G = government spending G = government spending I = investmentI = investmentNX = net exportsNX = net exports


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Tw o Typ es of GDPTw o Typ es of GDP

Nominal GDPNominal GDPGDP that has not been adjusted for inflationGDP that has not been adjusted for inflation

Real GDPReal GDPThe inflationThe inflation--adjusted measure that reflects the value of adjusted measure that reflects the value of all goods and services produced in a given yearall goods and services produced in a given year


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InflationInflation

Two main indexes that measure inflationTwo main indexes that measure inflation

Producer Price Index (PPI)Producer Price Index (PPI)Consumer Price Index (CPI)Consumer Price Index (CPI)

Measure of price changes in goods and servicesMeasure of price changes in goods and servicesMost widely used tool to measure inflationMost widely used tool to measure inflation


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S ourcesS ources

U. S. Department of Commerce, Bureau of U. S. Department of Commerce, Bureau of Economic AnalysisEconomic Analysis

www .bea .gov www .bea .gov GDP data was comprised quarterly GDP data was comprised quarterly

U. S. Department of Labor, Bureau of LaborU. S. Department of Labor, Bureau of LaborStatisticsStatistics

www .bls.gov www .bls.gov CPI data was comprised monthly CPI data was comprised monthly


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Wh at is InflationWh at is Inflation

A sustained rise in the general price level; aA sustained rise in the general price level; asituation in which the price of everything goessituation in which the price of everything goes

up more or less at the same timeup more or less at the same time

Things get more expensiveThings get more expensive

Measured by GDP deflator and Consumer PriceMeasured by GDP deflator and Consumer PriceIndex (CPI)Index (CPI)


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C auses of InflationC auses of Inflation

W hen the money supply increases faster thanW hen the money supply increases faster thanthe quantity of goods available increases we havethe quantity of goods available increases we have

inflationinflation

However, as the supply of goods increase, theHowever, as the supply of goods increase, themoney supply has to increase or else pricesmoney supply has to increase or else pricesactually go downactually go down


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C PIC PI

How we measure inflationHow we measure inflationTime series measured of a weighted average of Time series measured of a weighted average of

prices of a set of goods and services purchasedprices of a set of goods and services purchasedby consumersby consumersCan be used to track changes in prices of goodsCan be used to track changes in prices of goodsand service purchased for consumption by and service purchased for consumption by householdshouseholds


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C PI UnadjustedC PI Unadjusted


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C PI adjusted for energ yC PI adjusted for energ y


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Im portance of InflationIm portance of Inflation

Inflation affects both Investment andInflation affects both Investment andConsumptionConsumption

GDP = C + I + G+ NX GDP = C + I + G+ NX


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Inflation and Federal Funds RateInflation and Federal Funds Rate

Increase in Federal Funds rateIncrease in Federal Funds rateDecreases the Supply of fundsDecreases the Supply of fundsMore expensive for banks to borrow from each other . More expensive for banks to borrow from each other .

More expensive to provide loans (prices can rise)More expensive to provide loans (prices can rise)

In other words an increase in the federal fundsIn other words an increase in the federal fundsrate can cause GDP to decreaserate can cause GDP to decrease


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Regular Inflation Vs. AdjustedRegular Inflation Vs. Adjusted

InflationInflationThe CPI does take into account inflation causedThe CPI does take into account inflation causedby soaring energy pricesby soaring energy prices

Inflation from CPI less energy and food helpsInflation from CPI less energy and food helpscontrol for shock effects caused by rising energy control for shock effects caused by rising energy prices .prices .


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Unad j ust ed I nf l at i on

Unad j ust ed I nf l at i on

I nf l a

t i on

6 J6-Ju

6-M6-A

6-M6-Fe

6-Ja5-D

5-N5-O

5-Se5-Au5-J

5-Ju5-M

5-A5-M

5-Fe5-Ja

4-D4-N 4-O

4-Se4-Au

4-J4-Ju

4-M4-A

4-M4-Fe4-Ja

-1

-0.5 0

0.5 1

1.5

Perce


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Adjusted for Energ y PricesAdjusted for Energ y Prices

Inflation Less energy and food

- 1

-0 .5

0

0. 5

1

1.5

Percent


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GDP Gro w th Vs. InflationGDP Gro w th Vs. InflationGDP Growth Rate a nd Un a djus te d Infl atio n Rate,

Qu arter ly

-0.6-0.4-0.2

00.20.4

0.60.8

11.21.4

1.6

q104

q204

q304

q404

q105

q205

q305

q405

q106

q206

q306

q406

Unadju s d Inflation Rate GDP Growth Rate


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Polic y C onsiderationsPolic y C onsiderations

Can influence inflation rate by controlling theCan influence inflation rate by controlling theamount of money in circulationamount of money in circulation

Greater supply of money (without an increase inGreater supply of money (without an increase inquantity of goods and services produced) =quantity of goods and services produced) =greater risk of inflationgreater risk of inflationFOMC can decide to:FOMC can decide to:

Increase Federal Funds RateIncrease Federal Funds Rate Head off inflationHead off inflationDecrease Federal Funds RateDecrease Federal Funds Rate Increase money supply,Increase money supply,

risking inflationrisking inflation


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Recent FOM C DecisionsRecent FOM C Decisions

Jan. 2007Jan. 2007Inflationary pressures may be sustained by resource utilizationInflationary pressures may be sustained by resource utilizationCommittee expected a moderation of inflationary pressuresCommittee expected a moderation of inflationary pressures

Concerned about increasing inflation levelsConcerned about increasing inflation levels

March 2007March 2007Again, resource utilization has potential to increase inflation ratesAgain, resource utilization has potential to increase inflation ratesCommittee concerned that inflation risks will not moderate asCommittee concerned that inflation risks will not moderate asexpectedexpectedHowever, most participants expect core inflation to gradually declineHowever, most participants expect core inflation to gradually declinealthoughalthough


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Y =C + I + G + (X Y =C + I + G + (X- -M)M)

CPI up, not a major inflationary worry Although inflation has increased since

December of 2006, it is expected to moderateRecommendation: maintain federal funds rate at5.25%

FOM C RecommendationsFOM C Recommendations


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Q uestion 1Q uestion 1

W hat can the FOMC do to moderateW hat can the FOMC do to moderateinflationary pressures?inflationary pressures?

(A)(A) Increase the Federal Funds RateIncrease the Federal Funds Rate(B)(B) Decrease the Federal Funds RateDecrease the Federal Funds Rate(C)(C) Maintain the current Federal Funds RateMaintain the current Federal Funds Rate

(D)(D) Federal Funds Rate is not controlled by theFederal Funds Rate is not controlled by theFOMCFOMC


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W hat can the FOMC do to moderateW hat can the FOMC do to moderateinflationary pressures?inflationary pressures?

Answer (A) Increase the Federal Funds RateAnswer (A) Increase the Federal Funds Rate


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W hat is the formula for GDP?W hat is the formula for GDP?(A)(A) GDP = C +IGDP = C +I G + NX G + NX

(B)(B) GPD = inflationGPD = inflation CPICPI(C)(C) GDP = C + I + G + NX GDP = C + I + G + NX (D)(D) GDP = adjusted C + I + G + NX GDP = adjusted C + I + G + NX


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W hat is the formula for GDP?W hat is the formula for GDP?Answer (C) GDP = C + I + G + NX Answer (C) GDP = C + I + G + NX


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W hat does the Adjusted CPI take intoW hat does the Adjusted CPI take intoaccount?account?

(A)(A) Energy pricesEnergy prices(B)(B) GDPGDP(C)(C) InflationInflation

(D)(D) Energy Prices and food pricesEnergy Prices and food prices


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W hat does the Adjusted CPI take into account?W hat does the Adjusted CPI take into account?Answer (D) Energy and food pricesAnswer (D) Energy and food prices


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W hat is inflation?W hat is inflation?(A)(A) A rise in pricesA rise in prices

(B)(B) A rise in CPIA rise in CPI(C)(C) A sustained rise in general prices levelsA sustained rise in general prices levels(D)(D) C but not A and DC but not A and D


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W hat is inflation?W hat is inflation?Answer (C) A sustained rise in general prices levelsAnswer (C) A sustained rise in general prices levels

Real Gdp Inflation Spring 2007 Section 1

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