A manager needs to monitor: A manager needs to monitor consumer price index, producer price index, and Measures of wage inflation. First a manager should look to the product price index since this is where the inflation or price changes will first be seen. Although PPI is less stable large increases in PPI can show foreshadowing of an increase in your company’s costs.This results in your company being able to read increases of prices due to inflation. Managers should also look at measures of wage inflation since this is the single highest increasing piece of wage inflation. This will determine how much your company’s employee cost will be going up or down.
The Phillips Curve shows an inverse correlation between (inflation) and (unemployment) using data from 1861 - 1958. It implies the Fed could achieve low unemployment at the cost of high inflation.
The Phillips Curve broke down in the 1970s when Lyndon Johnson inaugurate Great Society social programs while the Fed kept interest rates low.
So is there a tradeoff between inflation and unemployment? Milton Friedman and Edmund Phelps says:
In the long term high inflation is bad. If inflation is high long-term it will cause volatile inflation rates that make business planning much more difficult. This also influences banks cause banks are less hesitant to loan money out when inflation is high, also making businesses less likely to investment. Based on this Alan Greenspan came up with an economic theory that states the des cannot reduce unemployment, except temporarily and low inflation is preferable to high inflation.
prices of inputs and outputs
It’s easier to pass on costs increases when the following is true:
Being able to account for inflation is very important. If you don’t account for it you may pay the price by going bankrupted. Accounting for inflation is especially important when looking at long-term contracts because a change in price can result in a major negative shift in profit or can cause the buyer to go bankrupt due to lowered prices that weren’t accounted for making him pay a much higher price. Inflation clauses solve this problem by creating contract adjustment to account for increase/decrease of prices. This makes contract much easier for businesses and buyers because it allows for the price to change due to inflation. Without it there can be serious shift during a contract involving inflation that could mess up the logistics of a contract completley.
Measures of inflation are tracked through CPI and are not accurate when following the percent change data throughout the years since there are many ups and downs that don’t result in a increase/decrease. But, If you are to look at the average trend of CPI, ignoring all the minute ups and downs, you can see that CPI is good at measuring inflation. It is also important to take into account that when measuring inflation you must look into less simple terms and look directly into how your business can be affected and monitoring this to see when it is.
A business for whom raw materials constitute a major cost should hedge against the risk of sharp increases in the price of raw materials by:
Explan each of the following terms in your own words. The author explains the terms in the textbook. If necessary, you may also Google the term on the Web. Good resources include:
Explain the terms in your own words briefly.
How much prices are increasing or descreasing during a certain period of time.
Reflects changes in prices for goods and services used by households.
Goods sold by manufacturers and wholesalers, otherwise goods sold that are business to business transactions. Not sold to a person but a store or company.
Theory stating if inflation is high unemployment will be low and that if unemployememnt is high inflation is will be low.
The maximum amount of product a company can afford to produce.
When Inflation and unemployment are increasing while economic development is decreasing.
Describe the characteristics of the following events briefly.
The author writes the Phillips Curve broke down in the 1970s. Elaborate. During the 1970’s the Phillip curve stating if we want low inflation, we have to tolerate high unemployment and vice-versa. In the 1970’s this was prove false since when policy makers began to use this theory unemployment and inflation was seen rising. This is seen as stagflation, when inflation and unemployment higher and economic development declines.