# data[].attributes.headline
GDP Deflator - Courtesy of the St. Louis Fed.  

# data[].attributes.subject
GDP Deflator - Courtesy of the St. Louis Fed.  

# data[].attributes.attachment_link.title
Gross Domestic Product: Implicit Price Deflator

# data[].attributes.attachment_link.description
Graph and download economic data from Q1 1947 to Q2 2018 about implicit price deflator, headline figure, inflation, GDP, and USA.

# data[].attributes.attachment_link.title
K-12 : Student Resources : U.S. Bureau of Labor Statistics

# data[].attributes.body
The Ups and Downs of Prices

# data[].attributes.attachment_link.readable_text
How Do You Know the Real Price of Something?

"Back in my day, a gallon of gas cost a quarter!" Has your grandfather ever said something like this to make a point about how expensive things are now? The chart shows the prices of gasoline over the past 20 years. The price of gasoline indeed used to be much lower. In fact, the price of gasoline has risen from a little over $1 per gallon in 1992 to a little over $3.50 per gallon 20 years later. However, this type of data cannot be interpreted casually because the prices do not account for -the rise in the general price level-which must be factored in to accurately compare prices over time. This process is often referred to as deflating and involves using commonly agreed-upon measures of inflation, such as the inflation , to account for inflation. Consumer Price Index

We first take the prices as given (that is, the nominal prices) and adjust for inflation, because we need to measure the two prices in constant terms. (A price adjusted for inflation is called the price.) So, what would the real price of a 1992 gallon of gas be if purchased in 2012? The answer is approximately $1.78 real -only about a 99 percent (not 226 percent) increase-but still a pretty dramatic increase. In other words, the price of gas almost doubled from 1992 to 2012 when measured in terms of other goods and services.

This example shows the price increase for just one good, but inflation reflects the increase in the general price level for goods. Occasionally, the general price level can fall but this happens less often. A fall in the general price level over a sustained period, as during the Great Depression in the United States, is known as . deflation

Costs of Inflation and Deflation

Unexpected inflation and deflation have consequences and costs. Since inflation occurs more frequently, we discuss its costs first. Inflation is costly for anyone who holds on to a large amount of cash (in a non-interest-bearing account) because cash will not buy as much tomorrow as it will today. In times of high inflation, people have incentives to keep as little cash on hand as possible, which means frequent trips to the bank or automated teller machines (and wearing out your shoes). Shoe-leather costs are the term used for these trips.

Second, inflation is costly in terms of menu costs , which are the costs incurred by firms when they change the prices of their goods. When prices are stable, firms have little incentive to change prices as long as they are maximizing profits. However, when prices change, as occurs with inflation, firms either have to change prices to keep pace with inflation or operate at prices that do not maximize profits. For example, if a restaurant changes its prices, it incurs the cost of printing new menus with the new prices for meals (hence the origin of the "menu" term).

A third cost of inflation is related to the use of resources in producing goods and services. Consumers decide what goods and services to buy by comparing the prices and quality of various goods and services. Their decisions determine whether steel is allocated, for example, to minivans or sports cars or whether milk is allocated to cheese or ice cream. Inflation causes the prices of some goods to rise more than others. This means when consumers make these price comparisons in times of high and unstable inflation, they are using garbled price information and resources are not allocated to their best use.

Fourth, inflation distorts money's ability to act as a standard measure of value, which causes inconvenience and/or confusion. For example, imagine how confusing it would be if 1 inch this year did not equal exactly 1 inch next year. We expect units of measurement to be constant over time, and inflation erodes money's ability to maintain a constant value.

Finally, it is worth noting that the above-mentioned costs all occur even if inflation is expected. However, when inflation is expected, it has an additional cost: the arbitrary redistribution of wealth. Since not all on investments or debt take inflation into account, inflation benefits those who borrow money by lowering the real cost of their debt. In other words, people who borrow money will repay their loans with dollars that are worth less than the ones they borrowed, thus arbitrarily making them wealthier. Conversely, unexpected inflation hurts investors, savers, and lenders by lowering the real return on their assets. For example, lenders will be repaid with dollars that are worth less today than the ones they lent, thus arbitrarily making them less wealthy. interest rates

Deflation occurs less often than inflation but also creates economic costs. Some costs, such as menu costs and relative price changes, mirror inflation costs. However, deflation is perhaps most costly because it is usually triggered by a weak economy; thus, it arises amid other undesirable economic episodes (e.g., stagnant growth or high unemployment).

Price Stability

When inflation is low and stable, both producers and consumers are better able to plan for the future, keeping economic growth and employment stable as well. Therefore, as one part of its congressional dual mandate, the Federal Reserve System seeks to promote price stability . The Fed uses to promote a low and stable monetary policy (around 2 percent) by influencing interest rates and the money supply. However, it is important to keep in mind that monetary policy affects the average rate of inflation over the long run. People's expectations about prices matter more for inflation over shorter periods. inflation rate

Conclusion

Comparisons of prices from one period with prices in another period must take inflation into account. Economic costs are associated with both inflation and deflation. Since price instability is costly, it is the Fed's mission to use monetary policy to promote stable prices.

Notes

# data[].attributes.attachment_link.title
Making Sense of the Ups and Downs of Prices

# data[].attributes.attachment_link.description
"Back in my day, a gallon of gas cost a quarter!" Has your grandfather ever said something like this to make a point about how expensive things are now? The chart shows the prices of gasoline over the past 20 years. The price of gasoline indeed used to be much lower.

# data[].attributes.headline
PBS, Bitcoin and our favorite Econ reporter - Paul Solman.

# data[].attributes.subject
PBS, Bitcoin and our favorite Econ reporter - Paul Solman.

# data[].attributes.attachment_link.readable_text
Daily Video

Bitcoin is a form of digital currency invented in 2009 to be used over the Internet, and is not tied to any one country or government. Bitcoin has been a favorite currency among libertarian techies skeptical of government-issued money, and global criminals who like the anonymity Bitcoin offers. However, mainstream investors and the public are taking notice of the so-called "crypto-currency", especially after the fall of Silk Road, an online black marketplace for drugs and other contraband, payable in Bitcoin.

Bitcoins are strings of characters, like a password or code, and are generated all over the Internet by anybody running a free application called a Bitcoin miner. They are based on a mathematical algorithm, which advocates say is almost impossible to break. They are transferred directly from person to person without going through a bank or clearinghouse. And while governments can simply print more money when needed, Bitcoins were invented with an upper limit - no more than 21 million Bitcoins can be created.

Bitcoin users say these solid rules are what make the currency attractive, but skeptics are less sure of the system.

"I'm like Warren Buffett. I don't buy something if I don't understand it, said economic historian Richard Sylla. "And for all I know, the person who created Bitcoins would be like King Henry VIII in Britain, who decided suddenly to double the amount of British money units around, and there was a big inflation."

Warm up questions

1. What do you know about currency and inflation? Give an example of inflation.
Definition from Merriam-Webster - a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

2. How do you pay for things online? Have you ever used Bitcoins?

Discussion questions

1. Why aren't Bitcoins used by most people?

2. Why is a currency not tied to a country or bank a riskier to use than one that is?

3. Do you see a future for the Bitcoin or for currencies like it on the web?

# data[].attributes.attachment_link.title
Digital Currency Bitcoin Attracts New Mainstream Appeal | PBS NewsHour Extra

# data[].attributes.attachment_link.description
Bitcoin is a form of digital currency invented in 2009 to be used over the Internet, and is not tied to any one country or government. Bitcoin has been a favorite currency among libertarian techies skeptical of government-issued money, and global criminals who like the anonymity Bitcoin offers.

# data[].attributes.body
Jacob and Adriene talk about rising prices

# data[].attributes.attachment_link.title
Inflation and Bubbles and Tulips: Crash Course Economics #7

# data[].attributes.attachment_link.title
Macro 4.4- Interest Rates: Real vs Nominal Practice