Tuesday, June 15, 2010

Trade allows us to get more goods at lower prices...does this make us better or worse off?

In my AP Macroeconomics class, when we look at the numbers in the Consumer Price Index, I ask students to see more than just numbers and statistics.  Reports like these (the CPI) can tell a story and reflect what is going on "out there in the real world".  One connection I ask student to make is to look at how the price(s) of certain categories of goods have changed over time and WHERE they are produced.  Are the goods subjected to competition domestically AND internationally? Does this make a difference in terms of the price of those items? The following graphs from HERE illustratre the price changes over time. The first one shows categories of goods that have INCREASED in price and the second categories of goods that have DECREASED in price...



The simple definition of inflation is "too much money chasing too few goods".  When you have world-wide competition, the production of goods is more diffused and plentiful, making the above definition harder to come to fruition and tends to put a damper on inflation.  However, when domestically you dont have the ability to greatly increase the production of a good relative to the money flowing to it then the definition becomes more appropos (education and healthcare supply are relatively INELASTIC).  One more observation---of the 2 categories of goods that have risen faster than anything else in the CPI, what do they have in common?   (HT: CoyoteBlog)
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