MACROECONOMICS
INFLATION
Glace N. Llorin
Discussion Outline
Topics to be Covered
Definition of Inflation
Terms: Deflation, Index, Price Index
Understanding Inflation
Why Study Inflation?
Pros and Cons of Inflation
Undesirability of Inflation
Gainers during the Inflation
Inflation is a quantitative measure of the
rate at which the average price level of
What is a basket of selected goods and services in an
economy increases over a period of time. It is
inflation? the constant rise in the general level of
prices where a unit of currency buys less
than it did in prior periods. Often expressed
as a percentage, Inflation indicates a
decrease in the purchasing power of a
nation’s currency.
TERMS
DEFLATION INDEX PRICE INDEX
General decline in An indicator or Normalized
prices for goods and measure of average of price
services, typically something, and in relatives for a given
associated with a finance, it typically class of goods or
contraction in the refers to a services in a given
supply of money and statistical measure region, during a
credit in the economy. of change in a given interval of
During deflation, the securities market. time.
purchasing power of
currency rises over
time.
Understanding Inflation
AS PRICES RISE, A SINGLE UNIT OF CURRENCY LOSES
VALUE AS IT BUYS FEWER GOODS AND SERVICES. THIS LOSS
OF PURCHASING POWER IMPACTS THE GENERAL COST OF
LIVING FOR THE COMMON PUBLIC WHICH ULTIMATELY LEADS
TO A DECELERATION IN ECONOMIC GROWTH. THE
CONSENSUS VIEW AMONG ECONOMISTS IS THAT SUSTAINED
INFLATION OCCURS WHEN A NATION'S MONEY
SUPPLY GROWTH OUTPACES ECONOMIC GROWTH.
To combat this, a country's appropriate monetary authority, like the central bank,
then takes the necessary measures to keep inflation within permissible limits and
keep the economy running smoothly.
Inflation is measured in a variety of ways depending upon the types of goods and
services considered and is the opposite of deflation which indicates a general
decline occurring in prices for goods and services when the inflation rate falls below
0%.
Whether one regards inflation as a “good” thing or a
“bad” thing depends very much on one’s economic
Why study situation. If you are a borrower, unexpected inflation is
a good thing—it reduces the value of money that you
Inflation?
must repay. If you are a lender, it is a bad thing
because it reduces the value of future payments you
will receive. Whatever any particular person’s situation
may be, inflation always produces the following
effects on the economy: it reduces the value of money
and it reduces the value of future monetary
obligations. It can also create uncertainty about the
future.
Suppose that you have just found a $10 bill you stashed away in
1990. Prices have increased by about 50% since then; your money
will buy less than what it would have purchased when you put it
away. Your money has thus lost value. Money loses value when its
power falls. Since inflation is a rise in the level of prices, the amount
of goods and services a given amount of money can buy falls with
inflation. Just as inflation reduces the value of money, it reduces the
value of future claims on money.
Pros Cons
Creates uncertainty and lower
Moderate inflation enables investment.
economic growth. High inflation often leads to lower
Moderate inflation allows growth and less stability.
adjustment of real wages. reduces international
Moderate inflation allows competitiveness.
adjustment of real prices. To reduce inflation can lead to
Inflation is better than deflation- recession.
which can cause recession. Fall in value of savings.
If wages can't keep up- lower real
wages.
Undesirability of Inflation
1.) PEOPLE WHO HAVE FIXED INCOME
-WITH INCREASED PRICES, PEOPLE WHO BELONG TO THIS GROUP WOULD
LOSE OUT BECAUSE THE INCOME THEY RECEIVE NOW WOULD BE ABLE TO
BUY LESS THAN [Link], THEIR ECONOMIC WELFARE IS
DIMINISHED.
2.) PENSIONERS, INSURED OR POLICYHOLDER
-UNLESS THE BENEFITS RECEIVED BY THE PENSIONERS ARE ADJUSTED TO
THE INFLATION RATE, THE PENSIONERS WOULD NOT SUFFER A NET LOSS.
3.) CREDITORS
-BECAUSE THE FIXED AMOUNT OF PRINCIPAL AND INTEREST THEY LENT
OUT WOULD NOW BE VALUED LESS. IF THE PERCENT RATE CHARGED BY
THE CREDITOR IS 12% BUT THE INFLATION RATE IS 20% THE NET LOSS OF
THE CREDITOR IS 8%.
Gainers during the Inflation
1.) PEOPLE WHO HAVE FLEXIBLE INCOME
-For example, business would gain more if the prices of the commodities they
produce and sell increase. So long as there is a demand for their product,
these would be sold. At higher prices, their income would obviously register
bigger gain.
2.) SPECULATORS
-Perceptive and lucky individuals who are able to buy goods at cheaper
prices and then sell later at higher prices because of inflation. Ex. Groceries,
appliances, jewelry.
3.) DEBTORS
-The value of money they borrow before would now have more value. Other
gainers would be people who built their houses in the ‘80s through housing
loans with SS or GSIS. There houses and lots are worth much now than
before.
ASSESSMENT
How does inflation affect
you?
REFERECES
[Link]
[Link]
macroeconomics/chapter/why-care-about-inflation/
[Link]
cons-of-inflation/
[Link]
cons-of-inflation/
[Link]
[Link]
philippines/