Module 3. Inflation
Real Income
The amount of goods and services that can be purchased with nominal income; the inflation-adjusted measure of income. Real Income = Nominal Income / Consumer Price Index X 100
Inflation
A general increase in the prices of goods and services
Deflation
A situation in which the inflation rate is negative
Consumer Price Index (CPI)
An economic indicator is used to measure over time the average price of a market basket of goods and services purchased by the typical consumer. Consumer Price Index (CPI) = Value of a market basket year t / Value of same Market basket in base year X 100
Formula for Current Value
Current Value = (Previous Value) x [(Current CPI) / (Previous CPI)]
Percentage Change in Real Income
percentage change in nominal income - percentage change in price level
Nominal Income
the actual number of dollars received in exchange for the different resources available in the economy.
Inflation Rate
the percentage change in the overall price of goods and services in the economy from one period to the other. Inflation Rate Year t = CPI Year t - CPI Year t-1 / CPI Year t-1 x 100
Producer Price Index (PPI)
a price index that measure the average change over time in the selling prices received by producers of goods and services.
Hyperinflation
a situation in which the inflation rate is positive and greater than 50% per month.
Disinflation
a situation in which the inflation rate is positive but declining over time