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Inflation

What is Inflation?

Inflation means rising prices on average. There are three ways of measuring this.

Consumer Price Index (CPI)

The CPI uses a basket of goods (food, housing, clothes, transportation, recreation), and looks at the change in price since the base year.

Producer Price Index (PPI)

Measures prices of goods sold by domestic producers

GDP Deflator

Nominal GDP/Real GDP. Straight up measures total inflation.

Effects

When inflation is high, that means the government is not producing at its fullest potential, decreasing the production possibility frontier.

Demand

Unemployment