ECON 200 Lecture Notes - Lecture 27: Real Wages, Plasma Display, Money Supply
15 Apr 2019
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19 Apr 19
Prices Don't All Move Together
• The overall price level generally rises, but some individual prices might stay the same or even
decrease
o 1984 Macintosh = $2,495
o 2018 iMac = $1,499
How Accurate is the CPI?
• Not realistic that we buy the same things year after year
• Concern that CPI overstates true inflation
o Substitution
o Quality changes
o New goods, services, and locations
Alternative Measures
• The Billion Prices Project (BPP)
o Academic initiative at MIT that tracks price changes of about 5 million items sold online
o Data is similar to CPI
Macro and Micro
• A price index is like this mosaic photo
o It aggregates all of the important drivers
The Costs of Inflation
1. Future Price Level Uncertainty
o Affects spending on resources
o Can slow future output and economic growth
o Prepare to Produce --> Produce --> Sell Output
o Today
• Borrow money
• Build capital goods
• Hire workers
o Future periods
• Repay loans
• Pay workers
• The real value of these future dollars depends on inflation
2. The Costs of Inflation
o When it is difficult to determine whether prices are changing from demands shifts rather
than inflation
o Increase price
• Increase demand
▪ Buy new resources
• Build factory
• Hire workers
• Other resources
▪ Increase output
• Increase inflation
▪ Don't change output
