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Econ 4.3
Friday, February 19, 1999
Announcements: Homework
Assignment #3 is posted on the webpage and is due on Wednesday.
The Chapter 8 and 9 quizzes will be online soon. The next exam
will be Friday, February 26th. Voluntary Pre-Exam Review
Session, Thursday, February 25, in 110 Wartik; 6:30 -
8:25 PM.
Lecture notes:
Inflation Creates Winners and Losers
- The effect of inflation on individuals
depends on how prices of items each buys or sells changes
- Inflation redistributes income and wealth
Redistributive Effects of Inflation
- Price Effects: Prefer goods and sevices
whose prices rise least get larger share of real income
- Income Effects: If nominal income rises
less than inflation rate, get smaller share of real
income
- Wealth Effects: If real value of assets
rises, become better off
- "Tax Effects": like a tax,
transfer income and wealth from one group to another
Other Effects of Inflation
- Social Tension: Between labor and
management, government and people, among consumers
- Despair: Real income, savings fall,
marital problems, loss of self esteem, even sexual
insecurity
- Money Illusion: Use of nominal instead
of real dollars to measure income and wealth changes
- Uncertainty, Speculation, Shortened Decision time
horizon
Inflation Rate Calculation
- Data: Cosumer Price Index (1982-84=100)
- 1990 CPI = 130.7
- 1991 CPI = 136.2
- Annual Inflation Rate = (Annual Change in PI / PI Value,
Initial Year)(100)
- 4.2% = (136.2 - 130.7)(100) / (130.7) = 1991 Inflation
Rate
- Data: Cosumer Price Index (1982-84=100)
- 1995 CPI = 152.4
- 1996 CPI = 156.9
- Annual Inflation Rate = (Annual Change in PI / PI Value,
Initial Year)(100)
- 2.96% = (156.9 - 152.4)(100) / (152.4) = 1996 Inflation
Rate
Macroeconomic Growth Problem
| Data |
1990 |
1991 |
| Money Value of GDP |
$5,513.8 |
$5,672.6 |
| Increase in GDP is $158.8 billion |
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|
| GDP Deflator |
112.9 |
117.0 |
| Increase in GDP deflator is 4.1% points |
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- Did the US economy really grow?
- Money Value of GDP increased
- Inflation caused prices to rise
Problem 2
- Deflating or correcting date for price change using index
numbers
- Nominal GDP Value / Price Index x 100 =
Real GDP Value
- Real GDP for 1990 = $5,513.8 bil / 1.129 = $4,883.8 bil =
$1984
- Real GDP for 1991 = $5,672.6 bil / 1.170 = $4848.4 bil =
$1984
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