Unit 3. Inflation

Active Vocabulary

inflation deflation relative price nominal price real income money illusion Consumer Price Index inflation rate price stability demand-pull inflation cost-push inflation

інфляція дефляція відносна ціна номінальний доход реальний доход грошова ілюзія індекс споживчих цін темп інфляції стабільність цін інфляція спричинена попитом інфляція спричинена вартістю

Most people associate inflation with price increases on specific goods and services. The economy is not necessarily experiencing an inflation, however, every time the price goes up. We must be careful to distinguish the phenomenon of inflation from price increases for specific goods. Inflation is an increase in the average level of prices, not a change in any specific price.

We first determine the average price of all output — the average price level — then look for changes in that average. A rise in the average price is referred to as inflation.

The average price level may fall as well as rise. A decline in average prices — a deflation — occurs when price decreases on some goods and services outweigh price increases on all others. Relative price is the price of one good in comparison with the price of other goods.

Because inflation and deflation are measured in terms of average price levels, it is possible for individual prices to rise or fall continuously without changing the average price level. Nominal income is the amount of money you receive in a particular time period; it is measured in current dollars. Real income, by contrast, is the purchasing power of that money, as measured by the quantity of goods and services your dollars will buy. If the number of dollars you receive every year is always the same, your nominal income doesn't change — but your real income will rise or fall with price changes.

There are two basic points about inflation to be learned:

- Not all prices rise at the same rate during an inflation. Typically, some prices rise very rapidly, others only modestly, and still others not at all.

- Not everyone suffers equally from inflation. Those people who consume the goods and services that are rising faster in price bear a greater burden of inflation; their real incomes fall more. Other consumers bear a lesser burden, or even none at all, depending on how fast the prices rise for the goods they enjoy.

Money illusion is the use of nominal dollars rather than real dollars to gauge changes in one's income or wealth.

The most common measure of inflation is the Consumer Price Index (CPI). As its name suggests, the CPI is a mechanism for measuring changes in the average price of consumer goods and services.

Inflation Rate is the annual rate of increase in the average price level.

Price stability is the absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent. Our goal of «full» employment is defined as the lowest rate of unemployment consistent with stable prices.

The most familiar form of inflation is called demand-pull inflation. Demand-pull inflation is an increase in the price level initiated by excessive aggregate demand. The name suggests that demand is pulling the price level. If the demand for goods and services rises faster than production, there simply won't be enough goods and services to go around.

Cost-push inflation is an increase in the price level initiated by an increase in the cost of production. In 1979, for example, the Organization of Petroleum Exporting Countries (OPEC) sharply increased the price of oil. For domestic producers, this action meant a significant increase in the cost of producing goods and services. Accordingly, domestic producers could no longer afford to sell goods at prevailing prices. They had to raise prices. The result was a cost-push inflation.

Exercise 1. Give the English equivalents:

підвищення цін, середній рівень цін, отримати великий прибуток, стабільні ціни, перебувати а пригніченому настрої, відрізняти явище інфляції від підвищення цін на окремі товари, мати сенс, купувати речі на продаж, темп інфляції, виробництво йде на спад.

Exercise 2. Write an appropriate word-combination:

average level of prices, nominal income, prices increase, relative price,

income, a deflation, real income;

1. Most people associate inflation with … on goods and services.

2. Inflation is an increase in the …, not a change in any specific price.

3. A decline in average prices …occurs when price decreases on some goods and services outweigh price increases on all others.

4. … is the price of one good in comparison with the price of other goods.

5. … is the amount of money you receive in a particular time period; it is measured in current dollars.

6. …, by contrast, is the purchasing power of that money as measured by the quantity of goods and services your dollars will buy.

7. Money illusion is the use of nominal dollars rather than real dollars to gauge changes in one’s … or wealth.

Exercise 3.Translate the following sentences:

1. Явище інфляції треба відрізняти від підвищення цін на окремі товари.

2. Впродовж останнього місяця інфляція на споживчі товари зросла на 5 відсотків.

3. Відносна ціна — це ціна одного товару в порівнянні з ціною інших товарів.

4. Інфляція найчастіше маємісце в країнах із нестабільною економікою.

5. Номінальний доход — це кількість грошей, які ви отримаєте за певний період.

6. Він досліджує про­блеми інфляції у цій країні вже протягом двох років.

7. Не всі ціни підвищуються однаково під час інфляції: деякі зро­стають дуже швидко, інші — помірно, а деякі зовсім не змінюються.

8. Темп інфляції — це щорічний середній темп підвищення рівня цін.

Exercise 4. Answer the following questions:

1. What is the inflation?

2. What is the deflation?

3. What is referred to as inflation?

4. What do we call the price of one good in comparison with the price of other goods?

5. What is the influence of price changes on your nominal and real income?

6. What are the two basic lessons about inflation?

7. What phenomenon do economists call money illusion?

8. What phenomenon do we observe when speculative profits become too easy?

9. What is the most common measure of inflation?

10. How can we calculate the inflation rate?

11. What do we call the absence of significant changes in the average price level?

12. What do we observe when the demand for goods and services increases faster than production?

Exercise 5. Read and translate the following dialog:

T.: Haven't seen you for a long time. What are you busy with?

D.: I am making preparations for my exam in economics. By the way I know

you are competent in questions concerning inflation. Will you help me to

distinguish the phenomenon of inflation from price increases for specific

goods.

Т.: With pleasure. The first thing you should take into account is that inflation

is an increase in the average level of prices, not a change in any specific

price.

D.: And what about deflation? Have you any idea about it?

T.: Well, deflation occurs when price decreases on some goods and services

outweigh price increases on all others.

D.: Thank you, Tom, there is one more point to be cleared up. What is the

difference between nominal income and real income?

Т.: Nominal income is the amount of money you receive in a particular time

period, and real income, by contrast, is the purchasing power of that money

as measured by the quantity of goods and services your dollars will buy.

D.: I see you are really a specialist in problems connected with inflation.

T.: Thank you for the compliment, but I'd like to draw your attention to the fact

that there are two basic lessons about inflation to be learned: not all prices

rise at the same rate during an inflation and not everyone suffers equally

from inflation.

T.: What do you mean by that?

D.: Typically some prices rise very rapidly, others only modestly and still others

not at all. Those people who consume the goods and services that are rising

faster in price bear a greater burden of inflation; other consumers bear a

lessen burden, or even none at all, depending on how fast the prices rise for

the goods they enjoy.

T.: And do you know anything about the measure of inflation?

Т.: Well, the most common measure of inflation is the Consumer Price Index.

As its name suggests the CPI is a mechanism for measuring changes in the

average price of consumer goods and services.

D.: I'm very much obliged to you for your exhaustive expla­nation. I think with

you help I'll pass my exam in a good way. Thanks a lot.

Т.: Not at all. Good luck!

D.: Why don't we go to the cafe and have a snack together?

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