20. Inflation: classification, causes and effects.

Inflation is an increase in the overall level of price s, expressed in the form of the power market.

Rate of Inflation - percentage increase in the level of prices over a 12-month period.

I According to inflation rates.

• Creeping(ползучая) or moderate inflation 10% of annual rate of inflation

• Galloping inflation 2-3 times of annual rate of inflation

• Hyperinflation. More than 10 times of annual rate of inflation

II According to predictability

• Expected, anticipated. When rates of inflation are predictable.

• Unanticipated. When rates are unpredicted, unexpected.

III According to causes

• Demand-pull inflation. Caused by persistant rises in AD when aggregate supply is unchanged at intermediate and classical ranges of AS.

• Cost-push inflation. Caused by persistance increase in average costs of production, and, therefore, persistant decrease

Types of cost-push inflation:

• Wage-push inflation

• Import price push inflation

• Supply shock inflation. Decrease in productivity.

Profit push inflation. Caused by monopoly power of

Effects of inflation. Costs of inflation.

1) redistributing effects of inflation.

Nominal income - the amount of currency received by people

Real income - amounts of goods and services people can purchase on this amount of money.

Real income = Nominal income / Price index (in hundreds).

% change in real income = % change in nominal income - % change in Price level.

Effects

1. Inflation penalizes, taxes a fixed nominal income receivers.

Inflation : people with fixed income and non-fixed income.

Indixation of income.

2. Inflation taxes savers.

3. Unanticipated inflation taxes creditors or lenders and benefits debtors, borrowers.

Less than inflation rate.

4. Anticipated or expected inflation doesn't influence creditors and debtors if the nominal interest rate moves one for one with the changes in expected inflation rate. A Fisher effect.

5. An anticipated inflation moves people into higher tax brackets.

As a result the real value of tax payments increases, but real value of disposable income decreases.

2) Output effects

1. National output increases under demand pull inflation and decreases under cost-push inflations.

2. National output decreases under hyperinflation.

3) Costs effects of inflation.

• Inflation increases costs of consumption. Shoeleather costs. - effect of stoptannih bashmakov. Costs are сonnected with more frequent trip to the bank. People prefer to withdraw small amount of money from the bank, because money bank increases interest rate.

• Inflation increases costs of production. Menu costs. Costs сonnected with price lists, catalogues.

• Inflation increases public costs.

21. Measurement of national output, unemployment and price level. National income accounting and the real living standard.

1. GDP = gross domestic product = the value of final output produced within the country over a 12-month period.

Final output is a sum of goods and services value that will not be processed, not used in production (further production) during the current year. Final output = Total output – intermediate output.

GDP is counted as a sum of value added

Σ(Value Added) = Factor payments + depreciation (обесценивание)

Σ(VA) = Σ(Final Output)

2. GNI (Gross National Income) and GNP (Gross National Product)

GNP – the sum of incomes earned by economy over a 12-month period (the sum of income earned by domestic residents within country and abroad).

GNI = GDP + national from abroad.

National income from abroad = (property income or factor payments of domestic residents from abroad) – (factor payments of foreign residents in a given country).

3. Net Domestic Product

NDP (in terms of product) or Net National Income (in terms of income). NDP – annual final output produced by domestic residents over and above capital goods worn out during the year.

NDP = GDP – depreciation. NNI (Y) = GNY – depreciation.

4. Households or personal disposable income

• Personal Disposable income (PDI) - is the total income available to households to spend after the payment of all taxes.

• PDI = NNI(at market prices) – indirect taxes (t_in) – company taxes – personal taxes – undistributed profits +subsidies+ benefits (transfer payments).

Three ways of GDP calculation:

1. Produced method or output approach according to it, GDP is a sum of value added in the economy.

2. Income methods or allocation approach. According to this GDP is a sum of factor payments. That’s incomes from factors of production.

3. Expenditure method or approach. According to this method, GDP is a sum of all expenditures in the economy.

Value_{(of national output)} = National income = National Expenditures

Expenditures method: GDP = C + Ig + G + Xn