A High School Economics Guide

Supplementary resources for high school students

Definitions and Basics

Inflation, from the Concise Encyclopedia of Economics

Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services….

We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI), published monthly by the Bureau of Labor Statistics. Subindexes are available for different cities and for many different classes of goods and services….

Consumer Price Index, from the American Heritage Dictionary at Dictionary.com

An index of prices used to measure the change in the cost of basic goods and services in comparison with a fixed base period. Also called cost-of-living index.

Definition: To adjust for inflation means to remove the effects of inflation from nominal prices or values so that their real changes can be compared over time. (See also Real vs. Nominal.)

Example. Suppose when you were 10 years old, a Sunday newspaper cost $2.00, but now that you are 20, it costs $3.00. The $1.00 price change is not all because newspapers now cost more relative to other goods like books, college education, etc., but partly because inflation has increased the cost of everything over time. That is, the nominal price increase of $1.00 is partly due to inflation.

If inflation has caused prices to rise by 20% in those ten years, then inflation alone would have caused the newspaper price to increase to $2.40. Thus the remaining $.60 price increase (=$3.00-$2.40) is the real economic increase in the price of the newspaper. An economist would say that the price of the newspaper, adjusted for inflation, has increased by 60 cents [or by 30%=($3.00-$2.40)/$2.00].

Adjusting for inflation, also called adjusting for the cost of living, is most often done by dividing by the consumer price index, published by the Bureau of Labor Statistics, a division of the U.S. Department of Labor.

Hyperinflation, from the Concise Encyclopedia of Economics

Inflation is a sustained increase in the aggregate price level. Hyperinflation is very high inflation. Although the threshold is arbitrary, economists generally reserve the term hyperinflation to describe episodes where the monthly inflation rate is greater than 50 percent. At a monthly rate of 50 percent, an item that cost $1 on January 1 would cost $130 on January 1 of the following year….

Inflation, at SocialStudiesforKids.com.

One of the concepts of economics most talked about by adults is inflation.
Simply put, inflation is a rise in prices relative to money available. In other words, you can get less for your money than you used to be able to get….

In the News and Examples

Adjusting for inflation is important: Capital Gains Taxes, from the Concise Encyclopedia of Economics

…Capital gains have been taxable in the United States since the enactment of the federal income tax in 1913. Several features of the tax on capital gains have remained constant throughout this period. Only capital gains and losses realized through the sale of an asset, not unrealized “paper” gains and losses, are recognized for tax purposes. The dollar amount of a taxable capital gain or loss is not adjusted for inflation. This means that some of the apparent capital gains that are taxed are actually phantom gains: they do not represent real gains in purchasing power….

A Little History: Primary Sources and References

Gold Standard, from the Concise Encyclopedia of Economics

Widespread dissatisfaction with high inflation in the late seventies and early eighties brought renewed interest in the gold standard. Although that interest is not strong today, it strengthens every time inflation moves much above 6 percent. This makes sense. Whatever other problems there were with the gold standard, persistent inflation was not one of them. Between 1880 and 1914, the period when the United States was on the “classical gold standard,” inflation averaged only 0.1 percent per year….

Irving Fisher, from the Concise Encyclopedia of Economics

Fisher was a pioneer in the construction and use of price indexes. James Tobin of Yale has called Fisher “the greatest expert of all time on index numbers.” Indeed, from 1923 to 1936, his own Index Number Institute computed price indexes from all over the world.

Fisher was also the first economist to distinguish clearly between real and nominal interest rates. He pointed out that the real interest rate is equal to the nominal interest rate (the one we observe) minus the expected inflation rate. If the nominal interest rate is 12 percent, for example, but people expect inflation of 7 percent, then the real interest rate is only 5 percent. Again, this is still the basic understanding of modern economists….

Advanced Resources

Related Topics

Real vs. Nominal

Monetary Policy and the Federal Reserve

Aggregate Demand