Inflation, Macroeconomics Video Lecture | Macro Economics - B Com

Inflation - and when most people talk about inflation, they talk
about price inflation. And that's just the increase in general level of prices for goods and services.
And you probably have a sense of that. That every year in kind of a normal
economy things seem to a little bit more expensive, although not
everything does. Especially if you look at something like
healthcare, cost of education, you definitely see things getting
more expensive. One interesting question is how do you
measure it? How do you measure inflation? And what the
Bureau of Labor Statistics does - this is actually the most used
measurement of inflation. They create something called a
Consumer Price Index. And the way they do it is they define a
basket of goods - actually a basket of goods and services.
So what they do is go and look at the average urban consumer
and they say "what do they need in their life?". "They may need some
housing, they might need some fuel - natural gas for their home
they need gasoline for their cars, energy in other ways. They might need
some type of services - they might need transportation". And they try to come up
with a basket of all of the things that the average consumer in
an urban environment might need. And they figure out how much
that would cost them in year One. And let's say that in year One,
that it costs them a hundred dollars - the actual basket CPI constructs would not
cost a hundred dollars. But I am going to do this for the sake of
simplicity. And they will weight these based on how much - what percentage they think
people spend on housing vs. fuel vs. services vs. transportation.
Then, they will look at the same basket each year after that.
So then they will do the same things - Housing, fuel, services,
transportation. And this will be in year Two now. And let's say
the same basket costs one hundred and two dollars. Well, then they
will say the general level of price and services for this consumer
went up by two dollars or went up by more important
thing is by the percentage - by two percent. So, based on this
measure, based on this basket of goods, prices went up by two percent.
Or you'll hear the people on news say this "Inflation rate went
up by two percent". Now, I want to clarify - what inflation - sometimes talks to inflation
in the money supply. People talk about there's more money being
printed. And often increase in money supply is one of the factors
that is driving price inflation. When most people talk
about inflation, they are talking about price inflation. They are
talking about increase in prices. They are not directly talking about
the increase in the money supply. Now this seems like a pretty
simple thing to do - but it is not as simple as you might first
think. Because think about something like TV sets or especially anything
that is technological. Do you look at the same TV set that is getting probably cheaper every year or do you look at the average
TV Set that the American household is having. Do you look
at the same computer that is getting significantly cheaper every
year or you look at the average computer every year? Then you
would actually be looking at a different product. So there's actually a lot
of things to think about and a lot of things how can weight this.
And there's been a lot of controversy in when the weightings
change in different periods of time. But this is the general idea
and it is really just the best attempt to figure out on average
how much more expensive or how much purchasing power are
we loosing from one year to the next.