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