Correcting Stats for Inflation & Aggregate Supply and Demand

1983

• Cost of a new home: $89,800.00

• Median Income: $20,885.00

• Cost of a first-class stamp: $0.20

• Gallon of regular gas: $1.24

• Cost of a dozen eggs: $0.86

• Cost of a gallon of Milk: $2.24 

1995

• Cost of a new home: $158,700.00

• Median Household Income: $34,076.00

• Cost of a first-class stamp: $0.32

• Cost of a gallon of regular gas: $1.15

• Cost of a dozen eggs: $1.16

• Cost of a gallon of Milk: $2.96 

2011

• Cost of a new home: $202,100

• Median Household Income: $40,925

• Cost of a first-class stamp: $0.44

• Cost of a gallon of regular gas: $3.89

• Cost of a dozen eggs: $1.25

• Cost of a gallon of Milk: $3.39

Inflation

• Prolonged rise in the general price level of final goods and services.

• Inflation decreases the Purchasing Power of the dollar. Value of the dollar is lower.

https://www.youtube.com/watch?v=UMAELCrJxt0

Deflation

• Prolonged decline in the general price level of goods and services.

• Not as common as inflation

Measures of Inflation

• Consumer Price Index (CPI)

• Producer Price Index (PPI)

• Real GDP

Consumer Price Index (CPI)

• Measure of the average prices of a specified set of goods and services purchased by typical consumers in city areas.

• In simple terms – Average change in prices from month to month

• CPI (Cont.)

• Market Basket – Representative sample of goods and services used to calculate the CPI

• 80,000 specific goods and services (food, housing, clothing, etc)

• Updated every 10 years

• Base Year – Year used as a point of comparison

http://www.investopedia.com/video/play/what-is-the-consumer-price-index-cpi/

***What is the current CPI? _______________________***

Producer Price Index (PPI)

• Measure of the change in price over time that U.S. producers charge for their goods and services.

• Price change of wholesale goods

• Changes in the PPI hint to changes in consumer prices (IE – The price you pay for goods)

http://www.investopedia.com/video/play/producer-price-index-ppi/

***List the last 3 months worth of PPI.

_______________________, _______________________, _______________________***

Real GDP

• GDP that has been adjusted for inflation

- Base year for Real GDP is the year 2000

• GDP Price Deflator - Removes the effects of inflation from GDP

• GDP inaccurate without figuring in for inflation.

https://www.youtube.com/watch?v=1Il5IQHcYP8

***See attached sheet***

Aggregates

• Summation of all the individual parts in the economy.

Aggregate Demand

• Aggregate Demand (Book Definition) – The total of all _______________ expenditures in the entire economy.

• Continued

• Another Definition – Total amount of goods and services demanded in the economy.

• C + I + G + X

• Price Level – Average price of all prices as measured by a __________ __________.

•

Aggregate Demand Shows….

• Increase in Price Level (Inflation) = Goods more ______________, purchasing power goes ___________________, fewer goods purchased.

• Decrease in Price Level (Deflation) = _____________________ less expensive, purchasing _____________________ goes up, more goods purchased.

• What can cause a shift in aggregate demand?

Aggregate Supply

Real _________________ output of producers based on the rise and fall of the price level.

Business Fluctuations (Causes and Indicators)

Causes of Business Fluctuations (AKA The Business Cycle)

• ________________ main forces – Business Investment/Decisions, Government Activity, External ____________________, and ____________________ Factors

https://www.youtube.com/watch?v=T5seDnLO6M4

Business Decisions

• Future Outlook – Things are going good they will spend more, create jobs. Things going bad, they will spend less, cut jobs.

• New Innovations – New inventions or production techniques.

Government

• Policies on taxing and spending money (Fiscal Policy)

• Controlling the money supply (Monetary Policy)

External Factors

• Examples…

• Wars

• Availability of raw materials

Psychological Reactions

• Panic (Ex. 9/11, this recent recession)

https://www.youtube.com/watch?v=dqxQ3E1bubI

***Predict what will happen, considering the above factors, now that Trump will be president.***

Economic Indicators

• Economic statistics that measure the economy

Leading Indicators

• Stats that may show what will happen in the economy (Major Indicators/Important)

Coincident Indicators

• Changes that occur at the same time as the change in the business cycle.

Lagging Indicators

• Seem to happen later on in the business cycle. Typically gives a clue as to the duration (length) of the phase.

https://www.youtube.com/watch?v=Y2_eRUGlwXk