Inflation Overview | Inflation | Finance & Capital Markets | Khan Academy | Summary and Q&A

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June 8, 2011
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Inflation Overview | Inflation | Finance & Capital Markets | Khan Academy

TL;DR

Inflation refers to the increase in the price of goods and services over time, measured by a consumer price index (CPI). It is different from monetary inflation, which is caused by an increase in the money supply.

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Questions & Answers

Q: How do economists calculate inflation?

Economists create a basket of goods and services that the average person would buy and measure their average cost over time. The weights of the basket may change as consumer preferences and technology evolve.

Q: Is there a difference between inflation and monetary inflation?

Yes, there is. Inflation refers to the increase in the price of goods and services over time, while monetary inflation refers to an increase in the money supply. Monetary inflation can contribute to price inflation if it exceeds the country's productive capacity.

Q: Why is adjusting for inflation important?

Adjusting for inflation allows us to compare prices and values across different years. It helps to account for the devaluation of currency and gives a more accurate understanding of the true cost of goods and services.

Q: What is the significance of the consumer price index (CPI)?

The CPI is a measure of price inflation and indicates the general increase in the price of goods and services. It helps economists analyze changes in the cost of living and its impact on individuals and economies.

Summary & Key Takeaways

  • Economists calculate inflation by creating a basket of goods and services and measuring their average cost over time. These baskets change as technology and consumer preferences evolve.

  • If the cost of the same basket of goods and services increases over time, the economist can conclude that inflation has occurred.

  • Inflation is often measured using CPI, and a higher CPI indicates a higher cost of living and the need for more money to maintain the same standard of living.

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