The PIE kit: teachers' guide

The PIE (People Inflation Economics) Kit: A Social Studies and Economics resource for Years 9 and 10.

The PIE Kit is a resource which was produced by the Reserve Bank in conjunction with Learning Media. These colourful kits were issued to all secondary schools in New Zealand in March 1997. The following text reproduces the copymasters from the Teachers' Guide and in places makes reference to the students' book Three Slices of PIE, copies of which were included in the original kit.

Means of exchange

Money, which Tony needs to buy his guitar, has developed over many hundreds of years.

In the past, people in agricultural societies provided everything for themselves. They grew fruit and vegetables to eat and trees for wood. They kept cows for milk, meat, and leather; sheep for wool and meat; and chickens for eggs and meat. This is called being self-sufficient.

They realised that they could trade or exchange things they grew for other things they needed. For example, they might have swapped some meat and eggs for some cloth. They could also swap their skills. For example, one person could build a house in exchange for having another person tend their garden. This is called barter.

People soon realised that if they concentrated on producing one type of good or service, they got better at producing it. This process is called specialisation.

Specialisation meant that people had to swap what they were good at producing for what they no longer provided for themselves. They needed a means of exchange. They first used barter, which is swapping goods or services for other goods or services. For barter to work, people had to agree to swap the goods and services they had produced and agree about what these goods and services were worth.

It was not easy to work out how many eggs equalled a plough. They decided they wanted a system where the means of exchange always had a standard value.

Some societies used a particular type of stone or shell. Other societies developed a means of exchange based on currency − coins and notes.

Even in today's society, some people choose to be as self-sufficient as possible, and we all use barter or exchange at some time in our lives.

When have you been self-sufficient or used barter or exchange to get something you wanted? Think about the kinds of things you could barter with, and present your ideas. You could use a collage, a cartoon, or a diagram, as well as text.

Auctioning the Kennedy belongings

A market is where buyers and sellers meet. There are many sorts of market. In some markets, buyers and sellers do not meet face to face, but via a computer. For instance, the Reserve Bank sells bonds (a financial good) to banks by ‘tender'. In a tender, each bank places a bid (the price they are willing to pay for the bond) without knowing what the other banks are bidding. Sometimes houses are also like this.

An auction is another type of market. After Jackie Kennedy died, nearly 6000 of her personal belongings were sold by auction at Sotheby's in Manhattan, New York.

The glossy catalogue showing all the items for sale cost US$90 for hardback and US$45 for softback versions. Over 100 000 of these catalogues were sold.

The objects were on public display five days before the auction, and 40 000 people came to see them. During the auction, people were able to bid by telephone as well as in person.

Once the bidding started, the prices went way beyond what Sotheby's predicted. People were prepared to pay very high prices to own something that had belonged to the Kennedy family.

This chart shows some of the items that were for sale, how much Sotheby's valued them for, and what they eventually sold for.

Item

Sotheby's Value

Final Price

A small stool with a torn cover

US$100-150

US$33,250

A set of golf clubs in a monogrammed golf bag

US$700-900

US$772,500

A 40-carat diamond engagement ring

US$500,000-600,000

US$2.6 million

An engraved sterling silver tape measure

US$500-700

US$48,875

A set of cushions

US$50-100

US$25,300

A triple strand necklace of fake pearls

US$700-900

US$211,500

Total proceeds from auction

US$4 million

US$34.5 million

Why do you think people were prepared to pay so much for the items in this auction?

Measuring prices

This section investigates how changes in price are measured and what the New Zealand public spends its money on.

Statistics New Zealand uses a price index to measure prices and how they change over time. A price index measures the average price level of a basket of goods and services in relation to the prices of these same goods and services in previous time periods. Statistics New Zealand staff collect prices by visiting stores and sending out price surveys by post. They also make regular visits to check the prices of goods and services in rural areas.

The Consumers Price Index

The Consumers Price Index (CPI) measures the change in the prices of over 300 goods and services that are commonly purchased by New Zealanders. The index includes goods and services in the following categories: food; housing; household operation; apparel; transportation; tobacco and alcohol; personal and health care; recreation and education; and credit services. It includes food items such as peanut butter, pizza, fruit and vegetables; clothing such as jeans, T shirts, and socks; and other items such as bus fares, petrol, and toys. The CPI does not include such items as investment and savings (shares, bonds, money in savings accounts), income tax, donations, items provided to charities or provided free by the government, or purchases that are difficult to measure, such as paintings or pets.

Source: Statistics New Zealand.

The prices of most goods and services are surveyed quarterly (every three months) but some, such as food and petrol, are surveyed monthly.

Make up a pie chart like the one above to represent how New Zealanders spend their money.

Teenagers Price Index

Imagine you are a committee from Statistics New Zealand who have been asked to develop a Teenagers Price Index.

You will need to work out what goods and services most teenagers spend their money on.

You should select a range of ten goods and services that will make up the price index.

Do some research to collect data that shows:

  • the average price for these items five years ago;
  • the average price for these items now.

Following this research, estimate how much the prices could change over a set period of time (a month, a term, a year, five years).

CPI Expenditure Weights (1993)

Percentage

Food

17.76

Housing

19.50

Household operation

14.92

Apparel

4.50

Transportation

14.58

Tobacco products and alcoholic drinks

8.46

Personal and health care

6.27

Recreation and education

7.50

Credit services

6.50

TOTAL

100.00

Purchasing power

Purchasing power means how much your money will buy at a given time.

In New Zealand, the purchasing power of the dollar has decreased since 1967. Look at the graph and work out:

  • what has happened to the value of money since 1967
  • what effect this would have on families

Imagine you are a financial reporter. Write a short article for an overseas newspaper describing:

  • the change in the value of money in New Zealand;
  • the effect of this change on one New Zealand family.

Inflation in New Zealand

When the general level of all prices goes up over time, it is called inflation.

In the story ‘Bottles and Bikes' (which you'll find in ‘Three Slices of PIE' in The PIE Kit), Ana finds it hard to get the money she needs to buy her bike because of inflation. The inflation rate in the story is 15.8 percent. This means that, overall, the prices of goods and services will go up by 15.8 percent by the end of the year. Some of the goods and services will increase more, and some may even go down in price, but overall the increase will be 15.8 percent.

The graph below shows the rate of inflation in New Zealand from 1965 to 1995.

What has happened to the rate of inflation since 1965?

Identify the period of time where:

  • the rate of inflation was the highest;
  • the rate of inflation was the lowest;

and work out why this has happened.

Hyperinflation

Inflation is when prices are increasing. When prices rise really fast − every week, every day − even by the hour – that's hyperinflation. Can you imagine going shopping when prices are going up every day? There are many examples of hyperinflation in history.

Germany after WW1

After the First World War Germany suffered from hyperinflation − wholesale prices rose by as much as 4100% in 1922. In times of hyperinflation currency becomes worthless − in Germany money was often left scattered in the street!

Brazil in 1989

There are some more recent examples of hyperinflation. This comment in the magazine The Economist describes taking a bus journey in Brazil in 1989:

‘If you were in Brazil over the Christmas holidays (in 1989) and tried to take one of those smart long-distance buses, you were probably stranded. With inflation at 1% a day, the fares set at the start of the month were by the end of it no longer enough to cover the bus firm's costs. So the buses stayed in the garage, the drivers took a holiday, and passengers got on the aeroplane, if they could.' The Economist, January 21, 1989

At a rate of 1% per day this makes an annual rate of 2000%!

Russia

Here's what high inflation can do:

Russian coin to be withdrawn

MOSCOW, Aug 28. Russia's smallest denomination coin, made worthless years ago by galloping inflation, is to be officially withdrawn 290 years after it was first introduced, Itar-Tass news agency said on Sunday.

A central bank official in St Petersburg told Tass that all single kopek coins, worth one hundredth of a rouble, would be taken out of circulation in the city over the next two months.

Tass did not say how long other parts of Russia would need to collect the coins, which would eventually be melted down.

The copper kopek, officially worth just $US0.0000046 has long been of interest only to coin collectors.

It first came into circulation in 1704 as part of monetary reforms introduced by Tsar Peter the Great.

It replaced the silver kopek, which Peter considered a waste of valuable metal.

Soviet authorities maintained the kopek, but reduced it in size and made it from a cheaper alloy of zinc and copper.

At the start of the century it was quite possible to live for a whole day on a kopek but by 1960 the coin would buy only a box of matches or a glass of carbonated water.

The kopek held its value during the last 30 years of Soviet rule before it vanished from sight as market reforms triggered runaway inflation.
- Reuter

The Evening Post, 29/8/94

The wage price spiral

The wage price spiral

What is happening in the diagram?

What do you think would happen if the spiral never stopped?

Who do you think should do something about breaking the spiral?

What could they do to break the spiral?

Government intervention

Ana's father was expecting a pay rise. This didn't happen because the government introduced a wage and price freeze in June 1982. This meant that prices, wages, and interest rates were frozen and could not change. The freeze was kept in place until 1984.

The wage and price freeze was an attempt to try to break the wage price spiral and stop inflation.

Which products on your Teenage Price Index (see Measuring Prices) might have increased in price during such a price freeze?

What happened to inflation during the price freeze, and after the price freeze was lifted?
Do you think the price freeze worked?

The Reserve Bank of New Zealand

The Reserve Bank of New Zealand was established by an Act of Parliament in 1934. Since the Reserve Bank Act of 1989, the Bank has had three main tasks:

  • to provide New Zealanders with currency;
  • to supervise banks in New Zealand;
  • to keep inflation low.

Meeting New Zealand's currency needs

The Reserve Bank is responsible for designing, printing, circulating, and destroying New Zealand's notes and coins. Old or damaged notes and coins are destroyed.

Maintaining a sound and efficient financial system

It is the job of the Reserve Bank to make sure the New Zealand banking system is working well. Check out the list of registered banks in New Zealand.

Keeping inflation low

Inflation can hurt the economy.

New Zealand in the 1970s (see ‘Bottles and Bikes') and 1980s (‘The Convertible') had very high inflation. The government tried to control inflation through the price and wage freeze, but this did not work.

Since 1989, the Reserve Bank has had the job of keeping inflation low. The Reserve Bank tries to keep increases in the Consumers Price Index between 0 and 3 percent.

The Reserve Bank has not always had the job of keeping inflation low. Before 1989, the Bank tried to help keep unemployment low, promote economic growth, and keep inflation low. However, the government came to realise that the Bank could not do all these things. It also recognised that the high inflation of the 1970s and 1980s had hurt New Zealanders. It was decided that the best thing the Reserve Bank could do was keep inflation low.

The Reserve Bank keeps inflation low because Parliament has decided that keeping inflation low contributes to helping the New Zealand economy to grow and helps to provide employment and development opportunities.

What can you find out about inflation?

Try checking the papers (or other parts of the Reserve Bank's website) for items on the Reserve Bank or inflation.

Inflation costs
Why is inflation not good for the economy?

  • Inflation is difficult for people on fixed incomes. If prices are rising but your income is fixed, as time passes you will be able to buy less and less. The purchasing power of your money has been eroded. This problem can be addressed if incomes are indexed or rise with inflation.
  • In ‘Bottles and Bikes', Ana couldn't afford the bike because her income stayed the same, even though many prices were rising.
  • In ‘The Convertible', Gran was on a fixed income; this made it hard for her when prices around her were rising. Can you think of someone you know on a fixed income?

High inflation tends to be more variable and hence unpredictable. This makes it difficult for business people to plan. People running a business find it hard to know what they will have to pay for raw materials, transport, and wages in the future. They may also find it difficult to decide what to charge for their products in the future.

  • Can you imagine running a business where you have to make decisions about the future every day? How might inflation make it difficult to plan?

Inflation makes it difficult to see what a price increase really means. When one price rises and all others stay the same, this is sending a signal to the market. The price increase says ‘bring more resources to this area'. However, if a price rises during a period of high inflation, it is hard to tell if it is a signal or if it is due to inflation.

  • Think back to Kim in ‘Lemon Aid' in The PIE Kit. If Kim sees the price of lemons has gone up from the previous year, it could mean two things: inflation has increased all of the prices in the economy or there has been a change in the demand for lemons and lemon squash has become the most popular drink in town, which has pushed the price up. If the price increase is due not to inflation but to increased demand for lemons, it would be worthwhile for Kim to try and sell more lemons.

Inflation can hurt savers. When you put money into a savings account, your reward is the interest your money earns. To maintain the purchasing power of your money, the interest rate will have to be at least as high as inflation. Otherwise your money will not buy as much in the future. If interest rates do not keep up with inflation, people will get little reward for saving. Having fewer people saving is not good for the growth of the economy.

When you borrow money, you have to pay it back with interest. In a time of high inflation, the purchasing power of money is being eroded. This means that fixed interest repayments will become worth less and less in real terms over time. In general, borrowers win in times of high inflation, and savers lose.

In ‘Bottles and Bikes', one of the stories in the booklet ‘Three Slices of PIE', Ana used Eddie's money. If she paid him 20 cents interest every week and there was inflation, what would happen to the value of the interest over time?

When there is high inflation, prices must be changed frequently. This is known as a menu cost − you can think of a restaurant menu being reprinted every few months as prices increase. Changing the menu takes time and costs money.

  • Ana had to change the price tags as part of her job at the dairy in ‘Bottles and Bikes' (The PIE Kit).

People who invest in assets tend to do well in times of high inflation. For example, assets like houses tend to keep their value in times of high inflation.

  • In ‘The Convertible' (The PIE Kit), Gran's house kept its value, even in times when inflation was high. Buying an asset to keep up with inflation is called hedging. Matt tried to hedge against inflation by purchasing a personalised number plate.

The Wonder Product

Imagine you are a small business wanting to make money by being enterprising. You want to develop and sell a new product.

  • Identify a product that is already for sale. Pick something you are interested in, for example, skateboards, a particular type of clothing, or food.
  • Work out what your company could do to this product that would change it in some way and add value to it. How might this change the price?
  • Identify all the things you will need (inputs) to produce your new product.
  • Fill in the production diagram for your new product.
  • Work out who is likely to buy your product and why. Are they people like you? Are they old or young? Why would they be interested in your product?
  • Work out what market research you would carry out with some people from your target market.
  • Work out what your product costs to produce and how you will price your product.
  • Identify the factors that affect:
    - the supply of your product; and
    - the demand for your product.
  • How would these influence the price of your product?
  • Design a marketing and advertising strategy for your new product.
  • Produce advertisements and promotions for your product.
  • Work out how you will evaluate the effectiveness of your product promotion. How can you tell if people like your product?

Present your research to the class. Use as many kinds of presentation as you can, for example: posters, reports, press releases, magazine or newspaper advertisements and articles, scripts for television, or radio reports and advertisements.