Lesson 2

Lesson Topic: Inflation

Goal: To introduce students to the concept of inflation, what it means, why it exists and how it impacts people’s everyday lives.

Lesson Overview:

1. Class discussion – What do they know about inflation?

2. Lecture/Background info – Key Definitions

3. Video – SchoolofLife - Inflation

4. Math lesson – Relative prices and how to calculate them

5. Student work – calculating relative prices.

6. Wrap-up or Extension activity

Class discussion questions: In the last lesson we talked about how much things cost and why. But have you ever walked into a store to buy something and noticed that the same item now costs a little bit more? Do prices of goods stay the same over time? Do they generally go up or down? Why? What do you think? Why would some things increase in price while other things decrease? What is the general trend, up or down? Have you ever heard the terms inflation/deflation/economies of scale? What do they mean?

Background Info:

Definition: Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. ... Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation's currency, meaning if prices trend upward, then the same amount of money buys less and less each year. (source invetopedia.com) I

Definition: 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. (Deflation rarely occurs)

Definition: Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because fixed costs are spread over a larger number of goods. Variable costs such as the cost of materials can also decrease if larger quantities at a time are purchased. Costs associated with production of goods generally fall into those two categories - fixed and variable.

Definition: Consumer Price Index - the CPI is a measure of the percentage change over time of the average cost of a large basket of goods and services purchased by Canadians.

Background Information/Lecture:

Ask any older person about the price of certain items when they were younger and the answer will likely surprise you. This is the result of inflation, the tendency of the price of goods to rise over time. In 1950, a dozen eggs cost about 50 cents, now a dozen eggs is between 3 and 4 dollars (six to eight times more). In 1950 the average cost of a new car was around $1500 now that has risen to over $30,000 (20 times more!) The average annual income for one person in 1950 was around $3500 and now it’s over $50,000 (around 15 times more). So looking at these numbers, if incomes have risen by 15x but the price of automobiles has risen 20x, that means cars are generally more expensive to buy relative to income than they were in 1950. This likely has more to do with the increased complexity and technology we see in vehicles now which has increased the overall cost of production. On the other side, eggs, at only a 6-8x increase, have actually become cheaper for us as a percentage of our income even though the price has ultimately gone up. The consumer price index takes a basket of goods that Canadians buy, goods that are considered staples (such as gasoline, food, housing, clothing and utilities) and it measures the average price change of these items over time, the averaged result is considered to be the ‘rate of inflation’ for Canada. Inflation is definitely country specific. One country can have high inflation while another has low inflation as one main aspect of inflation is the controlling of a country’s money supply. If the country prints too much money too quickly it devalues the existing money supply. Inflation can also differ slightly by region, for example in Canada, if you live in Nunavut, fresh goods and produce are much more expensive as they need to be flown in to many communities so then the price of these goods becomes linked to the cost of air travel to these locations.

Video: YouTube: As there are a myriad of excellent videos on this topic MSMM has not produced their own video for inflation. Instead, we recommend “What is Inflation” by #TheSchoolOfLife, which is available on YouTube. It is a clear, well explained look at inflation and its causes. There are many excellent videos on the concept of inflation online to help explain it to kids. It is a complex economic feature that economists today still argue about. Students could be asked to look up their own videos on inflation and then share what they learned with the class.

Activity: Using the Internet, have students look up historical price examples of common goods (electronics, Loaf of bread, milk, eggs, car, house etc) over a period of time, a decade is a good amount of time to look at. Students could each choose their own decade to concentrate on or work in pairs. You may use the worksheet provided or have students create their own basket of goods, ensure they have also looked up wages for Canada over their chosen time period as well. As long as common items are chosen most of this information is easily searchable back to at least 1930. When students are finished the activity have a class discussion about the results. Has everything gone up in price? Or have some things become cheaper? Are there specific time periods where certain things became cheaper or more expensive very rapidly? Why do you think that is? (example the OPEC Oil crisis of the 1970s) Are there any goods where the prices may have risen, but not as quickly percentage-wise when compared to wages? Which goods are they? This means that these goods, although they have increased in price, have actually become cheaper to buy as a percentage of income, just like eggs in the example above.

Calculating relative cost:

There are few ways to do this depending how precise you want to get.

First is the method listed above where you simply determine how many times the price has gone up over a given amount of time. We’ll use the example listed above.

Example 1:

Eggs 1950 - $0.50

Eggs 2020 - $4.00

Divide the most recent price by the past price - 4.00 / 0.50 = 8 The price of eggs has increased by 8 times over the last 70 years.

Income 1950 - $3500

Income 2020 - $50,000

Divide – 50,000 / 3500 = 14.3 Average income has increased 14.3 times over the last 70 years.

So because income has increased by a greater amount, we can buy more eggs, the price of eggs relative to income has decreased.

Example 2

If you would like to get a little more specific, use the price of any good, and compare it to the income at the time.

Eggs 1950 - $0.50

Income 1950 - $3500

Divide income by the price of the item – 3500 / 0.5 = 7000 You could buy 7000 cartons of eggs for the average income in 1950

Eggs 2020 - $4.00

Income 2020 - $50,000

Divide 50,000 / 4 = 12,500 You could buy 12,500 cartons of eggs for the average income in 2020, which is more which means your income is higher relative to the price of eggs. We are just saying the same thing, but in a different way.

To calculate the actual percentage, divide the price of eggs by the income level in that year.

1950: 0.50 / 3500 = 0.000143

2020: 4 / 50,000 = 0.00008

Because the decimal from 1950 is greater than the decimal from 2020, this means eggs were more expensive in 1950.

Classwork: Have students use a calculator to do the supplied worksheet questions on figuring out relative cost. Once they are good with the concept, have them work out the relative costs of the items (compared to income) that they chose for a particular year. Then they can compare around the classroom to other students who have done the same items but for a different year and see what they find out.

In-class/Homework Assignment/Extension:

• Extension of above activity - CPI basket examination. Look up which goods are actually part of the government’s CPI basket of goods. Do your own price comparisons of these goods at historical prices then compare them to historical and present day salary levels and perform equations to determine whether they have actually become more or less affordable.

• Have students look up the term ‘Hyper-Inflation’. Do some research into countries that have experienced hyperinflation in the past. What were the countries and when did it happen? Why did it occur and what was the result – how did it affect regular people?