Scribd
Upload
6 views3 pages

Lecture 4

Inflation is defined as a general increase in prices and a decrease in the purchasing value of money, with three main causes: demand-pull, cost-push, and built-in inflation. The Consumer Price Index (CPI) measures the average change in retail prices of a fixed basket of goods and services, serving as a key indicator for inflation rates and purchasing power. The document also provides formulas for calculating CPI and purchasing power, along with examples for computing these metrics for the years 2016 and 2017 using 2015 as the base year.

Uploaded by

Mami Lalita
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
6 views3 pages

Lecture 4

Inflation is defined as a general increase in prices and a decrease in the purchasing value of money, with three main causes: demand-pull, cost-push, and built-in inflation. The Consumer Price Index (CPI) measures the average change in retail prices of a fixed basket of goods and services, serving as a key indicator for inflation rates and purchasing power. The document also provides formulas for calculating CPI and purchasing power, along with examples for computing these metrics for the years 2016 and 2017 using 2015 as the base year.

Uploaded by

Mami Lalita
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Lecture #4.

INFLATION
INFLATION
A general increase in prices and fall in the purchasing value of money
(Oxford Dictionary)
Inflation is the rate of increase in prices over a given period. Inflation
is typically a broad measure, such as the overall increase in prices or the
increase in the cost of living in a country (
https://www.imf.org. January 8, 2022).

What Causes Inflation?


There are three main causes of inflation: demand-pull inflation, cost-push
inflation, and built-in inflation. Demand-pull inflation refers to situations
where there are not enough products or services being produced to keep
up with demand, causing their prices to increase.
Cost-push inflation, on the other hand, occurs when the cost of producing
products and services rises, forcing businesses to raise their prices.
Lastly, built-in inflation—sometimes referred to as a “wage-price spiral”—
occurs when workers demand higher wages to keep up with rising living
costs. This in turn causes businesses to raise their prices in order to offset
their rising wage costs, leading to a self-reinforcing loop of wage and price
increases (https://www.investopedia.com. January 8, 2022)

What is the Consumer Price Index (CPI)?


The CPI is an indicator of the change in the average retail prices of a
fixed basket of goods and services commonly purchased by households
relative to a base year. What are the uses of CPI? The CPI is most
widely used in the calculation of the inflation rate and purchasing
power of the peso. It is a major statistical series used for economic
analysis and as a monitoring indicator of government economic policy.
The CPI is also used to adjust other economic series for price
changes. For example, CPI components are used as deflators for most
personal consumption expenditures (PCE) in the calculation of the
gross national product (GNP). Another major importance of the CPI is
its use as basis to adjust wages in labor management contracts as
well as pensions and retirement benefits. Increases in wages through
collective bargaining agreements use the CPI as one of their bases
(Philippines Statistics Authority, January 8, 2021).

Formula
S Pg X Qb x 100
CPI = S Pb X Qb
Where: Pg – price of the given year
Qb – quantity of the base year
Pb – price of the base year

PPP =[ 1 / CPI ] x 100


Where: PPP – purchasing power of peso
Ir = CPI – 100%
Ir – inflation rate

Example:
2015
GOOD PRICE QTY
A 1255.80 398460
B 20 80
C 15 50
D 5 200
E 4 400

2016
GOOD PRICE QTY
A 11 120
B 18 100
C 14 80
D 6 250
E 5 420

2017
GOOD PRICE QTY
A 12 150
B 19 120
C 14 100
D 8 300
E 3.5 500

Requirements:
1. Compute CPI and PPP of 2016 using 2015 as base year
2. Compute CPI and PPP of 2017 using 2015 as base year
3. Compute CPI and PPP of 2017 using 2016 as base year

1. CPI 2016 (b=2015) = [11 x 100] + [18 x 80] + [14 x 50] + [6 x 200] +
[5 x 400] x 100
[10 x 100] + [20 x 80] + [15 x 50] + [5 x 200] + [4 x
400]
= 1,100 + 1,440 + 700 + 1,200 + 2,000 x 100
1,000 + 1,600 + 750 + 1,000 + 1,600
= 6,440 x 100
5,950
= 108.24%
Ir 2016 (b=2015) = 108.24 – 100 = 8.24%
The average increase in prices in 2016 with 2015 as base year is 8.24%.
PPP2016 (b=2015) = 1/108.24 x 100 = 0.92 or 92 centavos
The value of 1 peso in 2016 is 92 centavos using 2015 as base year.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy