3360 Unit 02.2.3 2014-I-01

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ENGR 3360U Winter 2014

Unit 2.2.3

Macroeconomics: Prices and Inflation

Dr. J. Michael Bennett, P. Eng., PMP,

UOIT,

Version 2014-I-01

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Unit 2.2 Macroeconomics

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'(an&e Record

2014!I!01 Initial 'reation

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2.2.3 Prices and Inflation

2.2.3.1 )(e 'ons*mer Price Inde+ ,'PI-

2.2.3.2 d/*stin& for Inflation

2.2.3.3 )es of Price '(an&es

2.2.3.4 Economic 'onse*ences of

Inflation

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2.2.3.1

Meas*rin& Inflation t(e al*e of Mone)(e 5al*e of mone deends *on t(e rices of &oods andser5ices

If t(e le5el of rices is tice as (i&(% 7100 8*s 9 as m*c(

&eneral increase in t(e rices of &oods and ser5ices illred*ce t(e 8*in& oer of an &i5en amo*nt of mone o5ertime

o do e meas*re ;t(e &eneral le5el of rices< ='ons*mer Price Inde+% 'PI is most commonl *sed inde+ )(e cost of a standard 8as>et of &oods ser5ices

relati5e to t(e cost of t(e same 8as>et of &oods andser5ices in a secific ear ,;t(e 8ase earet of &oods and ser5ices

'alc*lated mont(l 8 ?tatistics 'anada

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2014!I!01 "r. #.M. $ennett% P.En&.% PMP ENGR 3360U En& Eco2.2!@

'ons*mer Price Inde+100

base year inbasket of Cost year current inbasket of Cost CPI ×=

'PI meas*res c(an&es in rices of a ;tical< (o*se(oldcons*mtion mar>et 8as>et

W(atAs ;tical< c(an&es% so 'PI is occasionall ;re8ased<If 1BB2 C 100% "ecem8er 2004 C [email protected]

i.e. in "ecem8er 2004 it cost [email protected] to 8* t(e same 8as>et of &oods one co*ld 8*for 7100 in 1BB2

Don& term trend to (i&(er rices 1B2 C 6F.4 1B62 C 1.B 1B42 C 10.F

i.e. )(e standard 8as>et of &oods t(at cost 7100 in 1BB2 o*ld (a5e cost 710.F0 in1B42

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Inflation C H c(an&e in rice le5el

Rate of inflation

)(e percentage rate of change in rice le5el 'ons*mer rices meas*red 8 t(e 'PI

'PI is not t(e onl inde+ of rice le5el G"P deflator meas*res rices of all &oods ser5ices ,incl*din

in5estment &oods e+orts- 'an di5er&e 8eca*se 'PI meas*res rices of (at (o*se(olds cons*

W(ic( incl*des imorted cons*mer &oods 8*t does not incl*de e+orts or

in5estment &oods

$*t G"P deflator meas*res rices of (at t(e econom rod*ces W(ic( incl*des e+orts and in5estment &oods 8*t does not incl*de imorts

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2014!I!01 "r. #.M. $ennett% P.En&.% PMP ENGR 3360U En& Eco2.2!F

'ons*mer Price Inde+ ,'PI-% 2001 $as>et

'ontent'anada% ll Items Mont(l

Since 1992 the price level has risen slowly

Bt o!er 10 "ears, e!en an a!erage 2# $er "ear rate o% in%lation a&&s $ toslightl" 'ore than a 20# increase in the $rice le!el

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2014!I!01 "r. #.M. $ennett% P.En&.% PMP ENGR 3360U En& Eco2.3!

Inflation Performance in 'anada

?o*rce: http://www.bank-banque-canada.ca/en/indinf/cpi_graph_en.html

http://www.bank-banque-canada.ca/en/indinf/cpi_graph_en.htmlhttp://www.bank-banque-canada.ca/en/indinf/cpi_graph_en.html

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5era&e from 2000 is 2.1H'ons*mer Price Inde+% (istorical s*mmar ,1BB to 200- Jear ll!items '(an&e from re5io*s ear 2002C100 H

1BB F4. @.1 2030 BF. 2.@ 2013 123.2 1.0

1BB0 F.4 4. 2002 100.0 2.2

1BB1 2. @.6 2003 102. 2.

1BB2 4.0 1.4 2004 104.F 1.

1BB3 @.6 1.B 200@ 10F.0 2.2

1BB4 @.F 0.1 2006 10B.1 2.0

1BB@ F.6 2.2 200F 111.@ 2.2

1BB6 .B 1.@ 200 114.1 2.3

1BBF B0.4 1.F 200B 11@.@ 1.0

1BB B1.3 1.0 2010 11F. 2.0

1BBB B2.B 1. 2011 120.@ 2.3

2000 [email protected] 2.F 2012 122.0 1.@

"r. #.M. $ennett% P.En&.% PMP ENGR 3360U En& Eco2.3!B 2014!I!01

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"eflation

"eflation

Kcc*rs (en t(e rices of most &oods and

ser5ices are fallin& o5er time I.e. t(e inflation rate is ne&ati5e

$" NEW?

Econom contracts as man sto 8*in&%

aitin& for a loer rice in f*t*re

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2.2.3.2 d/*stin& for Inflation

Nominal *antit

*antit t(at is meas*red in terms of its c*rrent

dollar 5al*e

Real *antit

*antit t(at is meas*red in constant dollar

terms

"eflatin&

)(e rocess of di5idin& a nominal *antit 8 a

rice inde+ to e+ress t(e *antit in real terms

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Real Wa&e

nominalReal Wa&e

wage

CPI for that period =

Real a&e

)(e a&e aid to or>ers meas*red in terms of real

*rc(asin& oer "i5ide t(e nominal a&e 8 t(e 'PI for t(at eriod

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Nominal and Real Wa&es of o*rl Paid

Emloees in 'anada% 1B3!2003

Nominal 5s.. Real Wa&es

(o'inal )age*crrent &ollars+

eal )age*constant 12 &ollars+

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"eflation 8 t(e 'PI 5s. "eflation 8

t(e G"P "eflator G"P deflator is

rice inde+ for all t(e &oods and ser5ices t(at

ma>e * G"PG"P deflator can differ from t(e 'PI

'PI incl*des imort rices% e+cl*des e+orts

G"P deflator incl*des rices of rod*cer andintermediate &oods 'PI incl*des cons*mer

&oods and ser5ices onl

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2014!I!01 "r. #.M. $ennett% P.En&.% PMP ENGR 3360U En& Eco2.2!1@

Inde+in&

Inde+in&

)(e ractice of increasin& a nominal *antit

eac( eriod 8 an amo*nt e*al to t(e ercenta&e increase in a rice inde+

W( = Pre5ent *rc(asin& oer from 8ein&

eroded 8 inflation

Retire L 6@ li5e to @ = 20 ears of inflationcan erode real 5al*e of ension s*8stantiall

E+amle of inde+in&: 'anada Pension Plan 8enefits

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2.2.3.4 Nominal 5s.. Real Interest Rates

o m*c( are lenders reall &ettin& (en

t(e loan mone=

o m*c( are 8orroers reall ain&=

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2014!I!01 "r. #.M. $ennett% P.En&.% PMP ENGR 3360U En& Eco2.2!1F

Nominal 5s.. Real Interest Rates

r i= − π Nominal interest rate ,i-

Price aid er dollar 8orroed er ear

Real interest rate ,r-

Nominal interest rate min*s t(e inflation rate

'an 8e ne&ati5e or ositi5e% deendin& on sie of inflation rate

C inflation rate

i 2 2 i

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Ois(er Effect ,famo*s eco d*de-

)(e tendenc for nominal interest rates to 8e:

(i&( (en inflation is (i&( and

lo (en inflation is lo

WJ =

i&( inflation no ma>es eole anticiate (i&(

inflation in t(e f*t*re

Denders raise t(eir nominal interest rate so t(at t(eir

real rate of ret*rn is *naffected

$orroers are illin& to a more 8eca*se t(e real cost

of 8orroin& is t(e same

U i 2 2 M i

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2014!I!01 "r # M $ennett P En& PMP ENGR 3360U En& Eco2 2!1B

Inflation and Nominal Interest Rates in

'anada% 1B62!2003

Nominal 5s. Real Interest Rates

(o'inal interest rate

eal interest rate

In%lation rate

3360 Unit 02.2.3 2014-I-01

Documents

Transcript of 3360 Unit 02.2.3 2014-I-01