The study of the behavior of the economy as a whole is the field of macroeconomics. This study is completely different from microeconomics, whereas the latter focuses on individuals and how they arrive at economic decisions. It is unnecessary to say, the macro economy is very dense and complex and there are many factors that can affect it. These factors are studied and analyzed using forms of various economic indicators that tell people about the holistic condition of the economy.
Macroeconomists are on the verge of forecasting conditions in the economy in order to help firms, governments and consumers in making better decisions. Consumers are the group of people who wants to know how easy it is to be able to find work, how much it will cost them to buy goods and services in the market or how much will it cost them to borrow money. Businesses utilize macroeconomic analysis for them to determine if the expanding of production will be welcomed by the market, will consumers have sufficient money to buy the products or will the products stay on their shelves and expire.
The government turns to macro economy when creating taxes, budgeting spending, making policy decisions and deciding rates on interest. (Heakal 08) The macroeconomic analysis widely concentrates on three important factors: the national output (measured by the GDP), unemployment and inflation. This paper will tackle the third factor, which is inflation, an article will be introduce and furthermore probable solutions for this economic problem will be discusses as well. The third major factor that macroeconomists look at is the inflation rate, or the rate at wherein prices rise.
Inflation is basically calculated in two ways: through the Consumer Price Index (CPI) and the GDP deflator. The CPI provides the current price of a selected basket of goods and services that is updated from time to time. The GDP deflator is the ratio of nominal GDP to real GDP. If in the case that the nominal GDP is greater than real GDP, the economy can assume that the prices of goods and services have been rising. Both the CPI and GDP deflator is likely to move in the similar direction and be at variance by less than 1%. (Heakal 08)
Inflation is calculated by the growth rate in price levels measured as weighted averages of prices of a variety of goods and services. In the United States the Gross Domestic Product Deflator (GDPD) measures the price level for all goods and services, as well as factory equipment and other goods acquired by businesses, luxury goods, and goods purchased by the government. A further index, the Consumer Price Index (CPI), calculates the price level for goods and services which are related with the basic cost of living, which includes food, gasoline, utilities, housing, and clothes.
Inflation is an indicator in the economy that evaluates the fall in the currency’s purchasing power. Inflation is in general, the percentage increase in numbers, even though it is almost improbable to levy exactly because changes in the preferences of consumers. Typically inflation results from increase in the money supply, which leads to price increases. Inflation can also be defined as the general rise in prices throughout the economy. This is unique and different from a rise in the price of a particular good or service.
Individual prices are rising and falling all the time in a economy market, showing that consumer choices and preferences, and cost are changing. ( http://www. lycos. com/info/inflation 08) Oftentimes, economists see the controlling of inflation as a problem in the maintenance of the value of money, which rises in value, since the money supply is limited. In the 1980s a lengthened decline in the money supply’s growth ended the inflationary inactivity in the economy of the United States.
(http://www. lycos. com/info/inflation 08) A steady rate of slow inflation which is easily projected results to less disruption compared from high inflation rates showing considerable volatility. If inflation reaches the range of 300 percent annually or in some case may be higher, then the scenario is called hyperinflation. This is considered of dashing or running away inflation which is often related with the society’s complete breakdown. (Heakal 08)
Government expenditures during wartime can also be nearly counted on how to create pressures of inflation, as what had happened in the World War II for the United States. During the time of the USA government ratified price and wage control in order to restrain information. Price controls were lifted at the end f the war; however, it still remained as a problem throughout the era of cold war. It tends to become a problem given that the governments do not want to impose the taxes enough to support the expenditures of the government. (http://www. lycos. com/info/inflation 08)