6.02 Understand economic indicators to recognize economic trends and conditions A Describe the economic impact of inflation on business Understand economics trends and communication.

A Define Inflation: A persistent increase in the average price level in the economy. Inflation Rate: The percentage change in the price level from one period to the next. Deflation: A persistent decrease in the average price level in the economy. Consumer Price Index: An index of prices of goods and services typically purchased by urban consumers. Standard of Living: The amount of goods and services that a nation’s people have Targeted Inflation Rate: An acceptable rate of increase that the country attempts to control Price Stability: The condition in which the average price level in the economy changes very slowly, if at all.

Inflation Describe causes of inflation. – Inflation results when the economy has too much demand for available production. – The two causes of inflation: Demand-pull inflation results when economy-wide shortages are created by increases in aggregate demand. Cost-push inflation results when an economy-wide shortages are created by decreases in aggregate supply, which are so named because they are more often than not triggered by increases in production cost.

Inflation Explain how inflation impacts the economy. ◦ Makes products more expense, shifting how consumers will spend Describe the relationship between price stability and inflation. ◦ Price stability means that inflation rates will be low Explain problems associated with deflation. ◦ Manufacturers will be earning smaller profits or losing money as deflation occurs

Deflation Explain problems associated with deflation. – Deflation can haphazardly redistribute income and wealth. If some prices decrease more than others, then income and wealth is redistributed to the owners of those resources with the smaller price decreases. – Deflation creates uncertainty. If prices unexpectedly decline, then consumers and producers alike might be less willing to pursue long-term activities, because they just do not know what will happen to the price level.

Inflation Discuss reasons why the inflation rate should be above zero. – Indicates that demand is growing Explain how businesses can use the Consumer Price Index. – It provides timely information for consumers, businesses, and government leaders who make decisions that are sensitive to inflation.

CPI Discuss the purpose of the Consumer Price Index (CPI). ◦ The CPI is commonly used as: (1) an indicator of the price level and economic activity, (2) a method of converting nominal economic indicators to real terms, and (3) a means of adjusting wage and income payments for inflation. Describe how the Consumer Price Index is determined. ◦ an index of prices of goods and services typically purchased by urban consumers. This index, compiled and published monthly by the Bureau of Labor Statistics, provides a relatively accurate indication of the average price level in the economy, and thus inflation.

CPI total expenditures on market basket in current period CPI = total expenditures onx 100 market basket in base period

CPI Identify the major kinds of consumer spending that make up the Consumer Price Index. – measures goods typically purchased by urban consumers

Explain how the Consumer Price Index is used to find the rate of inflation. ◦ CPI measures the prices of a fixed market basket of goods ◦ If their price is going up, inflation is occurring Describe limitations on the use of the Consumer Price Index. ◦ CPI excludes goods purchased by rural consumers. It also excludes capital goods purchased by the business sector and the whole myriad of purchases made only by the government and foreign sectors. ◦ Measures about 60% of the economy and misses 40%