2024-2025
INTRODUCTION TO MACRO
ECONOMICS SUMMARY
MODULE 6 CHAPTER 31
INFLATION AND THE QUANTITY THEORY OF MONEY
KH
, The Baseline:
Inflation:
Inflation: An increase in the average level of prices measured by indexing the average price of a
fictional shopping basket consisting of a broad range of goods and services.
Inflation rate: the percentage change in the previously mentioned index over a period of time
(usually 1 year).
𝑃!"#$ & − 𝑃!"#$ &'(
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = ∗ 100%
𝑃!"#$ &'(
Price Indexes:
Consumer Price Index (CPI): Measures the average price of a basket of goods based on what the
average American consumer could buy. When calculating the CPI they try to take into account
the new goods and better quality goods.
(Covers ~ 80.000 goods and services weighted according to their impact on the average
household. Note: economists try to take into account the technological advancements, new
goods and better-quality goods.)
(Relevant for the average American consumer)
GDP Deflator: (covering all finished goods and services)
𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = ∗ 100%
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃
(Relevant for Governments and Businesses)
Producer Price Index (PPI): Average price received by producers. An interesting way to measure
inflation because this index also includes the intermediate and not just the finished goods and
services. The diRerent industries in a country also have their own PPI’s. This makes it possible to
identify struggling and booming industries.
(Relevant for Governments and Businesses)
Inflation around the world:
Not much substance here but here are some key takeaways:
- Real price: A price corrected for inflation over time. Used to compare the evolution of
prices of a certain good over time. (How much has the cost of a good risen or declined
providing that the buying power of the consumer has stayed the same?)
- Inflation in relation to crises: A strong correlation exists between a high inflation
percentage and crises, both locally and globally. (e.g. Oil crisis 1973, Banking crisis 2008,
COVID pandemic 2020…)
- Prices of technological goods over time: Initially the newest technology is always (very)
expensive but over time with technological advancements, broader availability, cheaper
manufacturing, wide adoption… can cause the ‘real price’ to go down (normal is up)
- High- and Hyperinflation: e.g. post WWI Germany, post covid Venezuela and Zimbabwe.
INTRODUCTION TO MACRO
ECONOMICS SUMMARY
MODULE 6 CHAPTER 31
INFLATION AND THE QUANTITY THEORY OF MONEY
KH
, The Baseline:
Inflation:
Inflation: An increase in the average level of prices measured by indexing the average price of a
fictional shopping basket consisting of a broad range of goods and services.
Inflation rate: the percentage change in the previously mentioned index over a period of time
(usually 1 year).
𝑃!"#$ & − 𝑃!"#$ &'(
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = ∗ 100%
𝑃!"#$ &'(
Price Indexes:
Consumer Price Index (CPI): Measures the average price of a basket of goods based on what the
average American consumer could buy. When calculating the CPI they try to take into account
the new goods and better quality goods.
(Covers ~ 80.000 goods and services weighted according to their impact on the average
household. Note: economists try to take into account the technological advancements, new
goods and better-quality goods.)
(Relevant for the average American consumer)
GDP Deflator: (covering all finished goods and services)
𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = ∗ 100%
𝑟𝑒𝑎𝑙 𝐺𝐷𝑃
(Relevant for Governments and Businesses)
Producer Price Index (PPI): Average price received by producers. An interesting way to measure
inflation because this index also includes the intermediate and not just the finished goods and
services. The diRerent industries in a country also have their own PPI’s. This makes it possible to
identify struggling and booming industries.
(Relevant for Governments and Businesses)
Inflation around the world:
Not much substance here but here are some key takeaways:
- Real price: A price corrected for inflation over time. Used to compare the evolution of
prices of a certain good over time. (How much has the cost of a good risen or declined
providing that the buying power of the consumer has stayed the same?)
- Inflation in relation to crises: A strong correlation exists between a high inflation
percentage and crises, both locally and globally. (e.g. Oil crisis 1973, Banking crisis 2008,
COVID pandemic 2020…)
- Prices of technological goods over time: Initially the newest technology is always (very)
expensive but over time with technological advancements, broader availability, cheaper
manufacturing, wide adoption… can cause the ‘real price’ to go down (normal is up)
- High- and Hyperinflation: e.g. post WWI Germany, post covid Venezuela and Zimbabwe.
