1. Measuring Economic Wellness: Another Method: Measuring Price Stability

2. Price Stability one of the main economic goals of national governments if prices rise faster than incomes, people cannot afford to purchase goods results: drop in sales=drop in production=slowdowns, shut downs=job losses=reduced tax revenues, etc.

3. Inflation the persistent rise in the general level of prices prices increase annually for variety of reasons Examples: - increasing consumer demand (shifts demand curves upward to the left=prices rise) - increases in prices of productive resources (ie. land, labour, capital) as they become scarcer

4. The C.P.I. C.P.I. = Consumer Price Index used by Canadian gov’t to track inflation measures the percentage change in prices of consumer goods between one year and the next (aka the inflation rate)

5. Calculating the C.P.I. StatsCan collects data on a representative “shopping basket” of 600 consumer goods/services typical “household” assumed to be urban with 4 members per household

6. each of the 600 items placed in one of 8 categories each category is “weighted” based on how much the typical household tends to spend on items in that category

8. Using the CPI to Calculate the Inflation Rate

9. A quick example:

10. So What, you ask? Who uses the CPI and why? Governments, labour unions, wage earners, pensioners CPI/inflation rate used to figure out how wages and pensions should be adjusted to account for inflation (ex. during contract negotiations)

11. COLA (????) “indexing”– increase wages/pensions at same rate as inflation to cover increased costs caused by inflation aka “C.O.L.A.” = Cost of Living Allowance Can be fully indexed or partially indexed

12. Limitations of the CPI a) many households do not match the norms of StatsCan’s “typical” household Ex. family size, smoking vs. non-smoking, Arctic vs. Southern Canada, etc. b) spending habits/products can change, often rapidly, over time – basket items and weights need to be updated periodically – can they keep pace with reality? c) multi-culturalism: expenses of maintaining one’s unique cultural practices may be greater than CPI compensates for – pension/wage indexing may “understate” one’s actual cost of living

13. Other Inflation Tidbits: “core rate of inflation” – basket of goods has most volatile elements removed fruit, vegetables, fuel oil, gasoline, natural gas, mortgage interest, intercity transp., tobacco Federal gov’t & Bank of Canada watch core rate most closely

14. “target rate of inflation”: Bank of Canada tries to keep core rate between 1% - 3% (ideally 2%) BoC uses interest rates to keep inflation within target area (raises rates if inflation too high, lowers rates if inflation too low)

15. “deflation”: prices falling rather than rising annually in short run, OK – industry productivity & efficiency rising (ex. 19 th C. England) could result in spiralling (uncontrollable) decreases as people keep putting off purchases sales drop, layoffs, closures, reduced revenues & taxes, etc.

16. “stagflation”: inflation rising but economic growth, purchasing power stagnating 1970’s: rising oil prices drive up prices generally – drop in consumer spending, layoffs, etc. profits, wealth transferred out of Cdn. economy into oil producing countries

17. “hyperinflation”: vicious cycle of rapidly increasing prices extreme ex. of “too many dollars chasing too few goods” : gov’ts print money to stimulate demand BUT demand doesn’t grow fast enough – value of currency drops

18. Examples 1920’s Ger.: inflation hits 3.25 million % per month 1940’s Hungary: 4.19 quintillion (10 18 ) % per month 1993: Yugoslavia issues a 500 billion dinar bill 2008: Zimbabwe at 6.5 sextillion (10 21 )% per month - one US dollar buys 1 billion Zimbabwean dollars (at par in 1983) 2009 - 2014: Zimbabwe has no national currency – other world currencies are used in everyday business

20. Zimbabwean inflation rates since independence (official up to Jul. 2008, estimates thereafter) DateRateDateRateDateRateDateRateDateRateDateRate 19807%198615%199240%199848%2004132.75%2008 Sep.3,840,000,000,000,000,000% 198114%198710%199320%199956.9%2005585.84% 2008 Mid-Nov.89,700,000,000,000,000,000,000% 198215%19887.3%199425%200055.22%20061,281.11% 198319%198914%199528%2001112.1%200766,212.3% 198410%199017%199616%2002198.93%2008 Jul.231,150,888.87% 198510%199148%199720%2003598.75%2008 Aug.471,000,000,000%

21. Thinking Like an Economist: Practicing the CPI Read p. 208 – 209 “Constructing a Price Index”, then answer Qu. 1 on p. 209 Read “Indexing to the CPI” on p. 211, then answer Qu.’s #1 & 2 on p. 211