ECO 007: Economic Development

Module #8 Student Activity Sheet

Name:____________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Lesson title: Concepts of Inflation Materials:

Lesson Objectives: Student Activity Sheets, calculator
1. Define inflation and explain its three types. References:
2. Compute consumer price index and inflation rate Economics by Bello, Camacho,
Catelo, Cuevas and Rodriguez.
2009 edition
Investopedia

A. LESSON PREVIEW/REVIEW

1) Introduction (2 min)
Another blessed day buddy! Our topic for today is very interesting because this is very timely and relatable
to your situation. This is all about Inflation. Have you ever wonder why a liter of gasoline costing 20 pesos
only several years ago is now doubling or tripling its price before? You will discover the answer if you will pay
attention to our topic for today.

B.MAIN LESSON
1) Activity 2: Content Notes (60 min)
You can underline or highlight important key notes to easily
Understand the topic about “Inflation”.

Answer: Inflation is a quantitative measure of the rate at

which the average price level of a basket of selected
Question #1:
goods and services in an economy increases over some
What is Inflation?
period of time. It is the rise in the general level of prices
where a unit of currency effectively buys less than it did in
prior periods. Often expressed as a percentage, inflation
thus indicates a decrease in the purchasing power of a
nation’s currency.

As prices rise, a single unit of currency loses value as it buys

fewer goods and services. This loss of purchasing power
Question #2: How impacts the general cost of living for the common public
does inflation which ultimately leads to a deceleration in economic growth.
work? The consensus view among economists is that sustained
inflation occurs when a nation's money supply growth
outpaces economic growth. 1
 ECO 007: Economic Development
Module #8 Student Activity Sheet

Name:____________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Answer: The three types of inflation are: (1) Demand-Pull

Question #3: inflation, (2) Cost-Push inflation and (3) Built-In inflation
What are the three (see below illustration)
types of inflation?

1. Demand-Pull Inflation
Demand-pull inflation occurs when the overall demand for goods and services in an economy
increases more rapidly than the economy's production capacity. It creates a demand-supply gap
with higher demand and lower supply, which results in higher prices. For instance, when the oil
producing nations decide to cut down on oil production, the supply diminishes. This lower supply
for existing demand leads to a rise in price and contributes to inflation.
Additionally, an increase in money supply in an economy also leads to inflation. With more money
available to individuals, positive consumer sentiment leads to higher spending. This increases
demand and leads to price rises. Money supply can be increased by the monetary authorities
either by printing and giving away more money to the individuals, or by devaluing (reducing the
value of) the currency. In all such cases of demand increase, the money loses its purchasing
power.

2. Cost-push inflation
Cost-push inflation is a result of the increase in the prices of production process inputs. Examples
include an increase in labor costs to manufacture a good or offer a service or increase in the cost
of raw material. These developments lead to higher cost for the finished product or service and
contribute to inflation.

3. Built-In Inflation 2
Built-in inflation is the third cause that links to adaptive expectations. As the price of goods and
services rises, labor expects and demands more costs/wages to maintain their cost of living.
Their increased wages result in higher cost of goods and services, and this wage-price
 ECO 007: Economic Development
Module #8 Student Activity Sheet

Name:____________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

There are several ways to measure inflation, but the most

Question #4: How
commonly recognized is the Consumer Price Index
can we measure
(CPI).
inflation?

Sample Illustration on How to Compute Inflation Rate Using Consumer Price Index (CPI)

Good Year 1 Year 2

Price (Php) Quantity Price Quantity
Pizza 10 20 11 30
Rent 600 1 640 2
Car 100 1 120 4
Phone 50 1 40 1

Step 1: Compute the nominal spending in each year. Simply multiply the price and quantity for each good then
get the sum.

Goods Year 1 Year 2

Pizza 200 330
Rent 600 1280
Car 100 480
Phone 50 40
Total Nominal Expenditure 950 2130

Step 2: To compute the CPI, choose the base year. For this example, let’s say that Year 1 is the base year.

Step 3: Next, multiply the prices of a given year by the BASE YEAR quantities and add them up.

Good Price (Php) Quantity (Base Year) Expenditure

Year 2
Pizza 11 20 220
Rent 640 1 640
Car 120 1 120
Phone 40 1 40
Total Consumption 1020

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 ECO 007: Economic Development
Module #8 Student Activity Sheet

Name:____________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Step 4: Compute the CPI using this formula:

CPI = Price of BASE YEAR consumption basket in any given year x 100
Price of BASE YEAR consumption basket in the BASE year

CPI = (1,020/950) x 100; CPI = 107.37

Note that this CPI would be reported by the Bureau of Economic Analysis as 107.37, since it is conventional to
multiply the ratio of the baskets by 100. You may think of the 107.37 number as saying that the consumption
basket in the second year costs 107 percent of the price of the basket in the base year.

The inflation rate is the percent change in the CPI. Here, it would be 7.37 percent.

What Is Deflation?
Deflation is a general decline in prices for goods and services, typically associated with a contraction in the
supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

2) Activity 3: Skill-Building Activities (30 min)

Part 1 (HURT or HELPED Activity) (10 min)

Does the word “inflation” sound positive or negative for you? Maybe you will initially say that inflation is
bad. It decreases the purchasing power of money. For this activity, I will help you understand that inflation
can HELP or HURT depending on the situation.
Direction: Write the word “HELPED” if the effect of inflation helps a certain group of individuals otherwise
write “HURT”. Use capital letters only.

_____1. Banks who extend many fixed rate loans

_____2. Students who put savings in a fixed rate savings account
_____3. Mechanics who pay for new tools with a fixed rate loan
_____4. People who sign a four-year lease on an apartment
_____5. Homeowners who purchase a home and have a 30-year fixed rate mortgage
_____6. Owners of land and physical assets
_____7. Workers on a fixed-wage contracts
_____8. Homeowners who purchase a home and have a 30-year adjustable rate mortgage
_____9. Retirees living on fixed income
_____10. Debtors on fixed repayment plans

Part 2 Self-Reflection (10 min)

For this part, I want you to give your own opinion about the following questions stated below.

a. What do you think is the ultimate cause of inflation?

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 ECO 007: Economic Development
Module #8 Student Activity Sheet

Name:____________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

__________________________________________________________________________________
_________________________________________________________________________________

b. What does "too many dollars chasing too few goods" mean?
__________________________________________________________________________________
_________________________________________________________________________________

3) Activity 4: Check for Understanding (18min)

CPI and Inflation Practice Problem
Direction: Complete the table and answer the following questions below.

Market No. of Year 1 (2000) Year 2 (2003) Year 3 (2005)

Basket Units
Items
Cost per Total Cost Cost per Total Cost Cost per Total Cost
Unit (Php) Unit (Php) Unit (Php)
Cheese 2 lbs 1.75 ? 1.50 ? 1.50 ?
Blue Jeans 2 pairs 12.00 ? 15.50 ? 20.00 ?
Gasoline 10 gallons 1.25 ? 1.60 ? 2.70 ?
Total Cost ? ? ?
of Basket

Using year 1 as our base year, using the formula above to calculate the consumer price index for each
year:

Year 1 Index = (base year)

Year 2 Index =
Year 3 Index =

Calculate the inflation rate on a percentage basis for the following:

Hint: formula = [(Ending index – Beginning index) / Beginning Index] X 100

Year 1 to Year 2:
Year 1 to Year 3:
Year 2 to Year 3:

C. LESSON WRAP-UP
1) Activity 5: Thinking about Learning (5 min)

A. Work Tracker

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 ECO 007: Economic Development
Module #8 Student Activity Sheet

Name:____________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

You are done with this session! Let’s track your progress. Shade the session number you just
completed.

B. Think about your Learning

1. Congratulations buddy! You’re done with this activity. How’s your learning experience? Kindly share
some productive tips you follow to hit our learning targets for today.
__________________________________________________________________________________
_________________________________________________________________________________

2. What specific topic caused a little confusion while studying the concept of inflation? What did you do
to fully understand that topic?
__________________________________________________________________________________
__________________________________________________________________________________

FAQS
1. What is deflation?
Deflation is a general decline in prices for goods and services, typically associated with a contraction in the
supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.

2. What is the current inflation rate of the Philippines?

The annual inflation rate in the Philippines rose to 2.5 percent in June 2020 from 2.1 percent in the previous
month and above market consensus of 2.2 percent. This was the highest inflation rate since March following
relaxed COVID-19 measures, with transport prices rebounding (2.3% vs -5.6% in May) and cost of housing &
utilities rising faster (0.4% vs 0.2%). Additional upward pressure also came from food (2.7% vs 2.9%),alcoholic
beverages & tobacco (18.5% vs 18%), clothing & footwear (2.4% vs 2.4%), furnishing, household equipment
and routine maintenance (4.1% vs 4.1%), recreation & culture (1.2% vs 1.4%), health (2.8% vs 2.8%),
communication (0.4% vs 0.3%), restaurant and miscellaneous goods and services (2.3% vs 2.4%), and
education (1.6% vs 4.7%). On a monthly basis, consumer prices rose 0.5 percent in June, the most since
January, after a 0.1 percent in May.