Economics Unit 3 Lesson 5: Inflation/Deflation. What Makes Money Important? 1. It’s a Medium of Exchange. Money is valuable because it is accepted in.

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Presentation transcript:

Economics Unit 3 Lesson 5: Inflation/Deflation

What Makes Money Important? 1. It’s a Medium of Exchange. Money is valuable because it is accepted in the buying and selling of goods and services. Money makes trading easier than it would be with barter. 2. It is a Store of Value. Money is a way of storing wealth. If you work today, you can get paid in money and wait to spend it in the future. 3. It is a Measure of Value Money can be used to state how much things are worth. The value of goods and services can be expressed in money prices to allow for easy comparisons

What is inflation? Inflation is:  A sustained increase in the average prices of all goods and services in the economy.  Can be caused by greater consumer demand (Demand Push) or greater production costs (Cost Push)  Pages 444 and 445. Inflation is not:  An increase price in one or a few goods or services  Supply and demand can impact price but not be due to inflation

Consumer Price Index Consumer Price Index (CPI)  Measurement used to determine inflation and deflation where the prices of over 200 categories of consumer goods and services are accounted throughout the month. (page 343)  Inflation has averaged about 3% a year for the last decade Deflation

How can it affect you? Purchasing Power of the Dollar Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase. Example: Let’s say you were born in 1993 and your parents bought a crib for $500. That same crib cost me $745 (actually around $1,500 since I bought two).

What is deflation? Identified as continuously falling prices/wages for well over a year and is not a decrease price in one or a few goods Is usually caused by a sustained decrease in wages Results in a sustained decrease in the average prices of all goods and services in the economy Is usually accompanied by sustained periods of falling production, unemployment, and limited capital investment (wealth).

Hyperinflation =w&q=hyperinflation+pictures&um=1&ie=UTF- 8&hl=en&tbm=isch&source=og&sa=N&tab=wi&biw=1228&bi h=812 =w&q=hyperinflation+pictures&um=1&ie=UTF- 8&hl=en&tbm=isch&source=og&sa=N&tab=wi&biw=1228&bi h=812

Inflation and GDP Stand on bathroom scale = 160 pounds Next time I adjust it without you knowing so it reads 10 pounds before you get on….so now you weigh 170 pounds. How do you know if you truly gained weight? You would need to know what it was set-at. How do we know if we are growing economically if we don’t know what the measure was set-at…so that’s why we take in account inflation.

GDP and Inflation So, our nominal weight would be 170 pounds, due to inflation. But our real weight would still be 160 pounds, since we want to adjust for inflation. Nominal GDP is GDP evaluated at current market prices. Real GDP is GDP evaluated at market prices of a base year.  For example, if 1990 were chosen as the base year, then real GDP for 1995 is calculated by taking the quantities of all goods and services purchased in 1995 and multiplying them by their 1990 prices.