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inflation
Lecture # 06
Inflation
Inflation is an increase in the overall
price level.
Deflation is a decrease in the
overall price level.
Sustained inflation is an increase
in the overall price level that
continues over a significant period.
Price Indexes
Price indexes are used to measure
overall price levels. The price index
that pertains to all goods and services
in the economy is the GDP price
index.
The consumer price index (CPI) is
a price index computed each month
by the Bureau of Labor Statistics
using a bundle that is meant to
represent the market basket
purchased monthly by the typical
urban consumer.
Inflation
Good
Pizzas
Rent
Car
Phone
Year
1
Quantity Price
20
$ 10
1
$ 600
1
$ 100
1
$ 50
2
Price
$ 11
$ 640
$ 120
$ 40
3
Price
$ 13
$ 650
$ 120
$ 40
Types of Inflation
Cost Push Inflation
Demand Pull inflation
Hyper Inflation
Value Added
Value added is the difference
between the value of goods as
they leave a stage of
production and the cost of the
goods as they entered that
stage.
In calculating GDP, we can either
sum up the value added at each
stage of production, or we can
take the value of final sales.
Value Added
Value Added in the Production of a Gallon of Gasoline
(Hypothetical Numbers)
STAGE OF PRODUCTION
VALUE OF SALES
VALUE ADDED
$ .50
$ .50
(2) Refining
.65
.15
(3) Shipping
.80
.15
1.00
.20
$1.00
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Calculating GDP
GDP can be computed in two ways:
The expenditure approach: A
method of computing GDP that
measures the total amount spent on
all final goods during a given period.
The income approach: A method of
computing GDP that measures the
incomewages, rents, interest, and
profitsreceived by all factors of
production in producing final goods.
Government consumption
and gross investment (G)
Net exports (EX IM)net
spending by the rest of the world, or
exports (EX) minus imports (IM)
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BILLIONS OF
DOLLARS
PERCENTAGE
OF GDP
7303.7
871.9
2115.0
4316.8
1543.2
1117.4
471.9
3.9
1972.9
693.7
1279.2
423.6
1014.9
1438.5
10446.2
69.9
8.3
20.2
41.3
14.8
10.7
4.5
0
18.9
6.6
12.2
4.1
9.8
13.8
100.0
Personal Consumption
Expenditures
Personal consumption expenditures
(C) are expenditures by consumers on
the following:
Durable goods: Goods that last a
relatively long time, such as cars and
appliances.
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Gross Investment
versus Net Investment
Gross investment is the total value
of all newly produced capital goods
(plant, equipment, housing, and
inventory) produced in a given period.
Depreciation is the amount by
which an assets value falls in a given
period.
Net investment equals gross
investment minus depreciation.
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Government Consumption
and Gross Investment
Government
consumption and
gross investment (G)
counts expenditures by
federal, state, and local
governments for final
goods and services.
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Net Exports
Net exports (EX IM) is the
difference between exports
and imports. The figure can
be positive or negative.
Exports (EX) are sales to
foreigners of U.S.-produced
goods and services.
Imports (IM) are U.S.
purchases of goods and
services from abroad).
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PERCENTAGE
OF GDP
8,199.9
80.3
6,010.0
58.9
Proprietors income
943.5
7.3
Corporate profits
748.9
7.3
Net interest
554.8
5.4
Rental income
142.7
1.4
National income
Compensation of employees
Depreciation
Indirect taxes minus subsidies
Net factor payments to the rest of the world
Other
Gross domestic product
Source: See Table 18.2.
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1,351.3
739.4
11.1
96.1
10,205.6
13.2
7.2
0.1
0.9
100.0
GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation
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DOLLARS
(BILLIONS)
10,205.6
+ 342.1
353.2
10,194.5
1,351.3
8,843.2
643.3
8,199.9
332.6
731.2
+ 439.1
+1,148.7
8,723.9
1,306.2
7,417.7
Disposable Personal
Income and Personal Saving
Disposable Personal Income and Personal Saving, 2002
DOLLARS
(BILLIONS)
Disposable personal income
Less:
Personal consumption expenditures
Interest paid by consumers to business
Personal transfer payments to foreigners
Equals: personal saving
Personal savings as a percentage of disposable personal income:
Source: See Table 18.2.
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7,417.7
7063.5
204.3
31.3
118.6
1.6%
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(2)
PRODUCTION
YEAR 1
YEAR 2
Q1
Q2
(3)
(4)
(5)
(6)
(7)
(8)
GDP IN
YEAR 1
IN
YEAR 1
PRICES
P 1 x Q1
GDP IN
YEAR 2
IN
YEAR 1
PRICES
P 1 x Q2
GDP IN
YEAR 1
IN
YEAR 2
PRICES
P2 x Q1
GDP IN
YEAR 2
IN
YEAR 2
PRICES
P2 X Q2
Good A
11
$.50
$ .40
$3.00
$5.50
$2.40
$4.40
Good B
.30
1.00
2.10
1.20
7.00
4.00
Good C
10
12
.70
.90
7.00
8.40
9.00
10.80
$12.10
$15.10
$18.40
$19.20
Total
Nominal
GDP
in year 1
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Nominal
GDP
in year 2
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The underground
economy is the part of
an economy in which
transactions take place
and in which income is
generated that is
unreported and
therefore not counted in
GDP.
U.S. DOLLARS
36,970
35,990
35,530
34,870
31,090
28,880
25,400
24,230
24,040
23,940
23,840
23,700
23,340
22,640
21,340
18,770
18,470
14,860
11,780
COUNTRY
Portugal
South Korea
Argentina
Mexico
Czech Republic
Brazil
South Africa
Turkey
Colombia
Jordan
Romania
Philippines
China
Indonesia
India
Pakistan
Nepal
Rwanda
Ethiopia
U.S. DOLLARS
10,670
9,400
6,860
5,540
5,270
3,060
2,900
2,540
1,910
1,750
1,710
1,050
890
680
460
420
250
220
100