<< Chapter < Page Chapter >> Page >

By the end of this section, you will be able to:

  • Calculate the annual rate of inflation
  • Explain and use index numbers and base years when simplifying the total quantity spent over a year for products
  • Calculate inflation rates using index numbers

Dinner table conversations where you might have heard about inflation usually entail reminiscing about when “everything seemed to cost so much less. You used to be able to buy three gallons of gasoline for a dollar and then go see an afternoon movie for another dollar.” [link] compares some prices of common goods in 1970 and 2014. Of course, the average prices shown in this table may not reflect the prices where you live. The cost of living in New York City is much higher than in Houston, Texas, for example. In addition, certain products have evolved over recent decades. A new car in 2014, loaded with antipollution equipment, safety gear, computerized engine controls, and many other technological advances, is a more advanced machine (and more fuel efficient) than your typical 1970s car. However, put details like these to one side for the moment, and look at the overall pattern. The primary reason behind the price rises in [link] —and all the price increases for the other products in the economy—is not specific to the market for housing or cars or gasoline or movie tickets. Instead, it is part of a general rise in the level of all prices. In 2014, $1 had about the same purchasing power in overall terms of goods and services as 18 cents did in 1972, because of the amount of inflation that has occurred over that time period.

(Sources: See chapter References at end of book.)
Price comparisons, 1970 and 2014
Items 1970 2014
Pound of ground beef $0.66 $4.16
Pound of butter $0.87 $2.93
Movie ticket $1.55 $8.17
Sales price of new home (median) $22,000 $280,000
New car $3,000 $32,531
Gallon of gasoline $0.36 $3.36
Average hourly wage for a manufacturing worker $3.23 $19.55
Per capita GDP $5,069 $53,041.98

Moreover, the power of inflation does not affect just goods and services, but wages and income levels, too. The second-to-last row of [link] shows that the average hourly wage for a manufacturing worker increased nearly six-fold from 1970 to 2014. Sure, the average worker in 2014 is better educated and more productive than the average worker in 1970—but not six times more productive. Sure, per capita GDP increased substantially from 1970 to 2014, but is the average person in the U.S. economy really more than eight times better off in just 44 years? Not likely.

A modern economy has millions of goods and services whose prices are continually quivering in the breezes of supply and demand. How can all of these shifts in price be boiled down to a single inflation rate? As with many problems in economic measurement, the conceptual answer is reasonably straightforward: Prices of a variety of goods and services are combined into a single price level; the inflation rate is simply the percentage change in the price level. Applying the concept, however, involves some practical difficulties.

Questions & Answers

the art of managing the production, distribution and consumption.
Satangthem Reply
what is economics
Khawar Reply
okk
damfash
marginal utility is the additional satisfaction one derives from consuming additional unit of a good or service.
Fred
It's the allocation of scarce resources.
Fred
marginal utility please?
Dishan
marginal utility is the additional satisfaction one derives from consuming additional unit of a good or service.
Fred
I know the definition, but I don't understand its meaning.
Dishan
what is the must definition of economic please?
Nurudeen
demand lfs
Alpha
Economics is derived from the word Oikonomia which means management of household things. Thus, Economics is a study of household things with the constrains of allocating scare resources.
Dishan
what is Open Market Operation
Adu Reply
dominating middlemen men activities circumstances
Christy Reply
what Equilibrium price
Adji Reply
what is gap
mirwais
who is good with the indifference curve
Dexter
What is diseconomic
Alixe Reply
what are the types of goods
WARIDI
how can price determination be the central problem of micro economics
simon Reply
marginal cost formula
Nandu Reply
you should differentiate the total cost function in order to get marginal cost function then you can get marginal cost from it
boniphace
What about total cost
Foday
ok
Foday
how can price determination be the central problem if micro economics
simon
formula of cross elasticity of demand
Theresia Reply
what is ceteris paribus
Priyanka Reply
what is ceteris parabus
Priyanka
Ceteris paribus - Literally, "other things being equal"; usually used in economics to indicate that all variables except the ones specified are assumed not to change.
Abdullah
What is broker
scor
land is natural resources that is made by nature
scor
What is broker
scor
what is land
kafui
What is broker
scor
land is natural resources that is made by nature
scor
whats poppina nigga turn it up for a minute get it
amarsyaheed Reply
what is this?
Philo
am from nigeria@ pilo
Frank
am from nigeria@ pilo
Frank
so
owusu
what is production possibility frontier
owusu
it's a summary of opportunity cost depicted on a curve.
okhiria
please help me solve this question with the aid of appropriate diagrams explain how each of the following changes will affect the market price and quantity of bread 1. A
Manuela Reply
please l need past question about economics
Prosper Reply
ok let me know some of the questions please.
Effah
ok am not wit some if den nw buh by tommorow I shall get Dem
adepojurafiu
Hi guys can I get Adam Smith's WEALTH OF NATIONS fo sale?
Ukpen
hello I'm Babaisa alhaji Mustapha. I'm studying Economics in the university of Maiduguri
Babaisa
okay
Humaira
my name is faisal Yahaya. i studied economics at Kaduna state university before proceeding to West African union university benin republic for masters
Faisal
Hi guys..I am from Bangladesh..
Mannan
Wat d meaning of management
igwe Reply
disaster management cycle
Gogul Reply
cooperate social responsibility
igwe
Fedric Wilson Taylor also define management as the act of knowing what to do and seeing that it is done in the best and cheapest way
OLANIYI
Got questions? Join the online conversation and get instant answers!
Jobilize.com Reply

Get the best Algebra and trigonometry course in your pocket!





Source:  OpenStax, University of houston downtown: macroeconomics. OpenStax CNX. May 28, 2014 Download for free at http://legacy.cnx.org/content/col11653/1.3
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'University of houston downtown: macroeconomics' conversation and receive update notifications?

Ask