Deflation

Deflation

Discussion and Examples

Introduction/Background:

In reviewing our materials and assignment for this week, I found myself very intrigued by the concept of inflation and the impacts to prices and costs over time. Being an avid baseball fan, the reference in the text regarding the salaries of Babe Ruth and Alex Rodriguez and how they stack up against each other if inflation was considered, was a fascinating discussion since it showed the impacts of the value of money and the experiential elements that come with it.

In recent news, there has been ample discussion about “deflation” or the tendency for prices to fall over time which I believe there would be benefit in discussing especially with regard to our economic situation. Additionally there is precedent for deflation slowing down recovery in Japan so it seemed a timely and relevant topic to discuss.

Regarding references, I’ve attempted to provide my perspective and understanding on deflation using the internet, an article on it by Paul Krugman in the NY Times as well as some portions in the text (N.Mankiw).

Prices change over time

As we have learned, the prices of goods and services change over time. Living in the United States, we are often reminded by our parents and grandparents of the prices of consumer goods like food or gasoline “back in the day”. The text (Principle of Economics) references the price of an ice-cream cone in 1930 as approximately three cents, something we currently spend between one and three dollars for depending on the store. Why the big change? Well these changes in prices reflect less the change in actual demand for ice-cream or necessarily the willingness-to-buy price as much as the fact that money has become less valuable over time.

The text references this mathematically:

“Suppose P is the price level as measured, for instance, by the consumer price index or the GDP deflator. Then P measures the number of dollars needed to buy a basket of goods and...