Introduction to inflation | Inflation - measuring the cost of living | Macroeconomics | Khan Academy
TLDRThis script discusses the concept of inflation, emphasizing that it typically refers to price inflation rather than monetary inflation. It explains the relationship between the two and how an increase in the money supply can lead to higher prices if it outpaces economic productivity. The script also touches on supply shocks, like the oil crises of the 1970s, as another cause of price inflation. It mentions the general consensus that a low level of inflation, around 1-3% annually, is beneficial, but higher rates can be problematic. In the U.S., inflation is measured using the Consumer Price Index (CPI), specifically the CPI-U for urban consumers, which is calculated by taking a weighted average of price changes in a basket of goods.
Takeaways
- 💡 Inflation today typically refers to price inflation, which is a general increase in the level of prices of goods and services.
- 💰 Historically, the term 'inflation' was sometimes used to refer to monetary inflation, which is an increase in the money supply.
- 🔗 There is a relationship between monetary inflation and price inflation, but they are not always the same, especially in the short term.
- 📈 The money supply is influenced by the amount of dollars printed, lending, and the number of transactions occurring in the economy.
- 📊 If the money supply grows faster than the economy's total real productivity, it generally leads to an increase in the level of prices.
- 🚨 Supply shocks, such as the oil crises in the 1970s, can cause sudden scarcity and lead to price inflation in various goods and services.
- 🛒 The cost of transportation, like gasoline for shipping, can significantly affect the prices of everyday items, including food.
- 📉 A general consensus exists that a little bit of inflation, around 1-3% per year, is good for the economy.
- 🚫 Economists are concerned about high inflation rates and negative inflation (deflation), both of which can have adverse effects.
- 📊 In the United States, inflation is measured using the Consumer Price Index (CPI), which is reported in the news and affects urban consumers.
- 🏙️ The CPI-U, which stands for Urban consumers, is the most commonly reported CPI because it represents the majority of the U.S. population.
- 🛒 The CPI is calculated by taking a weighted average of the price changes of a basket of goods, reflecting the spending habits of the consumer group in question.
Q & A
What is the current common reference to the term 'inflation'?
-The term 'inflation' today commonly refers to a general increase in the level of prices of goods and services, also known as price inflation.
What was the original meaning of 'inflation'?
-When the term 'inflation' was first used, it referred to monetary inflation, which is an increase in the money supply.
How are the concepts of price inflation and monetary inflation related?
-Price inflation and monetary inflation are closely related, but they are not always the same. An increase in the money supply can lead to price inflation if it grows faster than the total real productivity of the economy.
What is a supply shock and how does it affect prices?
-A supply shock occurs when the supply of something becomes scarce suddenly. This can lead to an increase in the price of that item and can also affect the prices of other goods and services due to the increased cost of inputs.
Can you provide an example of a supply shock?
-A typical example of a supply shock is the oil crises in the 1970s, where scarcity of oil led to a significant increase in oil and gas prices, affecting the prices of many other goods.
What is the general consensus on the level of inflation that is considered good?
-A little bit of inflation, specifically around 1 to 3% per year, is generally considered good as it can stimulate economic growth.
Why are economists concerned about high levels of inflation?
-High levels of inflation can be problematic as they can snowball and lead to hyperinflation, which has severe economic consequences.
What is the term used to describe negative inflation?
-Negative inflation is referred to as deflation, which is also considered a concerning economic scenario.
How is inflation measured in the United States?
-In the United States, inflation is measured using the Consumer Price Index (CPI), specifically the CPI-U, which stands for Urban consumers.
What does the 'U' in CPI-U stand for and why is it the most reported index?
-The 'U' in CPI-U stands for Urban consumers. It is the most reported index because it represents the majority of the population in the United States and thus affects the largest number of people's pocketbooks.
How is the CPI calculated and what does it measure?
-The CPI is calculated as a price index, measuring the general increase or change in the level of prices. It is based on a basket of goods for a specific type of consumer in a base year and how much the cost of this basket has grown relative to the base year.
Can you explain the simplified example given in the script for calculating CPI growth?
-In the simplified example, the CPI growth is calculated by taking a weighted average of the price changes of two goods (apples and bananas) based on the proportion of money spent on each in the base year. The growth in the price of each good is then combined to find the overall CPI growth.
Outlines
📈 Understanding Inflation and Its Measurement
This paragraph clarifies the concept of inflation, emphasizing that it typically refers to price inflation, which is a general increase in the level of prices for goods and services. It distinguishes this from monetary inflation, which involves an increase in the money supply. The speaker explains the relationship between these two, noting that while they are connected, they are not always the same. The money supply's growth, influenced by factors like printing more currency, lending, and the number of transactions, can lead to price inflation if it outpaces the economy's productivity. However, short-term price inflation can also be caused by supply shocks, exemplified by the oil crises of the 1970s. The paragraph also touches on the idea that a moderate level of inflation is considered healthy for an economy, ideally around 1-3% per year, but higher rates can be problematic. In the United States, inflation is measured using the Consumer Price Index (CPI), specifically the CPI-U, which focuses on urban consumers and is reported widely in the news. The CPI is a price index that measures changes in the level of prices over time.
📊 Calculating Inflation with the CPI-U Example
In this paragraph, the speaker illustrates how the CPI-U is calculated using a simplified example. The CPI-U takes a basket of goods consumed by urban consumers and compares the prices of these goods in the current year to a base year. The example given assumes that urban consumers spend 60% of their money on apples and 40% on bananas, with both items priced at 100 in the base year. The current year's prices are then compared, with apples increasing by 50% to 150 and bananas by 80% to 180. To calculate the CPI-U growth, a weighted average of these indices is taken, reflecting the proportion of spending on each item. The example concludes that the overall CPI-U has grown from 100 to 162, indicating a 62% increase in the price level. This simplified model is used to explain the concept, with a promise to explore the actual basket of goods used in the United States in a future video.
Mindmap
Keywords
💡Inflation
💡Price Inflation
💡Money Supply
💡Supply Shock
💡Consumer Price Index (CPI)
💡Deflator
💡Productivity
💡Hyperinflation
💡Deflation
💡Urban Consumers
💡Basket of Goods
Highlights
Economists today refer to inflation as a general increase in the level of prices of goods and services, specifically price inflation.
The term 'inflation' originally referred to monetary inflation or an increase in the money supply.
The relationship between money supply and price inflation is not always direct, with other factors like supply shocks influencing prices.
Supply shocks, such as the oil crises in the 1970s, can cause a sudden scarcity and increase in prices of goods and services.
An example of a supply shock's impact is the increase in the price of oil affecting the cost of transporting goods, including a banana to a grocery store.
A general consensus exists that a small amount of inflation, around 1-3% per year, is considered good for the economy.
Economists are concerned about the potential for inflation to spiral into hyperinflation or to become negative, leading to deflation.
In the United States, inflation is measured using the Consumer Price Index (CPI), which is often reported in the news.
The CPI-U, which stands for Urban consumers, is the most reported CPI as it reflects the spending patterns of most Americans.
The CPI is calculated as a price index, measuring the general increase or change in the level of prices over time.
The CPI calculation involves taking a basket of goods for a specific type of consumer in a base year and comparing it to the current year.
A simplified example is given where urban consumers spend 60% on apples and 40% on bananas, with base prices set at 100 for both.
In the current year, the apple index grows by 50% to 150, and the banana index grows by 80% to 180.
The CPI-U growth is measured by taking a weighted average of the growth in the indices of the goods in the basket.
The weighted average calculation results in a 62% growth in the CPI-U from the base year to the current year.
The next video will explore the actual basket of goods used in the United States for an urban consumer's CPI calculation.
Transcripts
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