11 Economic performance Flashcards
inflation
what is inflation?
a sustained increase in the general price level
what is deflation
a persistent fall of prices in an economy in a year (and occurs when the inflation rate is negative)
what is a deflationary spiral
the spiral begin with deflation which is when there is a sustained fall in the general price level . consumers notice the falling prices and decide to delay their purchases and wait for prices to fall further. this causes a reduction in AD as consumption is a component of AD. the fall in AD lowers the price level again so consumers continue to delay purchases repeating the cycle.
what is the two types of deflation
benign and malign
what are the two causes of inflation
demand-pull and cost push
what is demand-pull inflation
- AD increase , pulling up the price level , shifting AD to the right , leading to inflation
why does increase in AD cause inflation
- because more pressure is put on existing factors of production that are becoming scarce
- this result in higher cost for firms eg wages, labour, land
What is cost-push inflation
- when costs increase, decreases SRAS , shifting it to the left , pushing up the price level, leading to inflation
what is the value of money for inflation and deflation
inflation decreases the value of money ( more expensive , each pound is worth less), whereas deflation increases the value of money ( more cheaper, pound is worth more)
what is nominal income
Nominal income is the amount you actually earn
what does the inflation rate tell us
-The inflation rate tells us the percentage change in the price level.
what is real income
Real income shows how much your income is actually worth in terms of the amount of goods that you can purchase.
- nominal income with the effects of inflation removed
how do you work out inflation rate
change in price level/ original price level X 100
Explain stage 1 to calculating the UK’s price level.
Stage 1 - the Office of National Statistics conducts its Living Costs and Food Survey. This involves interviewing 7000 households to find the 650 most common goods and services and to find the percentage of their spending goes on each of these goods and services.
Explain stage 2 to calculating the UK’s price level.
Stage 2 - the ONS conducts a price survey where they collect prices of these 650 goods from across the UK in order to find the average price of each good.
