11)inflation Flashcards
What does deflation mean
A sustained decrease in the average price level over a period of time
What does inflation mean
Sustained increase in the average price level over a period of time
What is the target for inflation given to the bank of england
2% +/-1 CPI
What is the cost of inflation to individuals
❎rising prices reduce the purchasing power of money
❎shoe leather cost
Why is rising prices reducing the purchasing power of money, a cost of inflation to individuals
⚫️a problem for
➡️people with low fixed incomes: pensioners, students
➡️those who have saved money
Why is shoe leather cost a cost of inflation to individuals
⚫️consumers have to shops to find the best value goods
➡️more effort during period of frequently changing prices
➡️involves opportunity costs
What is the cost of inflation for firms
➡️ loss of international competitiveness
➡️business planing becomes more difficult
➡️menu costs
Why is loss of international competitiveness a cost of inflation for firms
➡️uk exporters will find their products to be more expensive in international markets
➡️sales may be lost to competitors operating in low inflation countries
➡️will lead to less exports
➡️reduced AD
Why is business planing becoming more difficult a cost of inflation for firms
➡uncertainty over future prices and cost of production, discourages businesses from investing
➡️less investment =
➡️reduced AD in short run
➡reduced LRAS/PPF in the long run
Why is menu cost a cost of inflation for firms
➡️businesses have to frequently publish prices during a time of rapid inflation
What is the benefits of low inflation
➡️business confidence increases
➡️maintains the purchasing power of money
➡️maintains the competitiveness of Uk exports
Why is the increase of business confidence a benefit of low inflation
➡️firms are able to plan for the future as they know what the cost of production is going to be
⚫️increases investments
➡️shifts AD curve to the right in the short run
➡️shifts LRAS and PPF to r
The right in the long term
Why is maintaining the purchasing power of money a benefit of low inflation
⚫️those in fixed incomes, like pensioners and students
➡️level of consumption in the economy will be maintained
➡️living standards will be maintained
Why is maintaining competitiveness of uk exports a benefit of low inflation
⚫️low inflation will mean prices of uk exports will not rise tok quickly
➡️so will not loose competitiveness against nations goods and services
What does CPI mean
➡️an index of consumer prices
➡️calculated by the ONS, using data from real economy
What is the 3 way CPI can be measured
➡️ basket
➡️family expenditure survey
➡️weighted average
How does the basket calculates CPI
➡️deciding on a representative basket of goods and services, consumers buy
➡️updated once a year
➡️to keep it representative of the things we buy
How is CPI calculated by the family expenditure survey
➡️a monthly survey of the goods in the basket
➡️collects personal diaries of spending be families and individuals in the UK
➡also uses questionnaires and interviews
How is CPI calculated by the weighted average
➡️each price is weighted according to the proportion of income spent on each item
➡️bread, milk -high weighted average in basket
➡️car- lower weighted average in baske
What does RPI mean
➡️another index of general consumer prices
➡️includes mortgage payments
What is demand pull inflation
➡️excessive growth in AD causes economy to have an increase in price level
➡️can result into an increase in any component of AD=C+I+G+(x-m)
➡️e.g. Income tax cut will increase consumption resulting in demand pull inflation
What is a cost push inflation
➡️AS curve shifts left
➡️due to increase in the cost of the factors of production
➡️increase in oil prices
➡️increase in wheat prices
➡️increase in wages
What are the causes of cost push inflation
➡️rising input costs
➡️rising labour costs
➡️higher import prices
➡️increases in indirect taxes
Give an example of rising input costs
➡️rising commodity prices
➡️oil
Give an example of rising labour costs
⚫️workers pay rising
➡️due to skill shortages
➡️or increase in minimum wage
Give an example of higher import prices
⚫️an exchange rate depreciation
➡️increases price of imports
Give an example of an increase of indirect taxes
➡️national insurance will increase the costs of producers
