2.1.2 /3 Flashcards
Define inflation disinflation and deflation
Inflation - general increased in price levels across the economy
Deflation - general decrease in the price levels across economy
Disinflation - fall in the inflation rate
What’s CPI
The ONS ( office of national statistics) use Average spending worked out with living costs and food survey where 5500 families record spending. Weighted basked of good dependent on spending and measure annual changes in the price of the basket to measure inflation.
Limitations of CPI
- Uses a sample so not totally representative + dif houses have dif spending
- not including housing prices which tends to rise faster so datas lower
- use to use RPI in the UK before 1996 so cannot be accurately compared before then
What’s RPI
Similar to CPI but includes housing costs ( eg. Mortgage, interest payments and council tax)
Excludes low income pensioners and top 4% becaus not ‘average’ household. CPI DOESNT.
What are the 2 causes of inflation?
Demand pull - if AD increases pushes price up
AD is total demand for g/s in economy
Cost push- If AS falls eg. Rise in price of cost of production means firms increase price to maintain profit margins.
EXTRA CAUSE
Increase I. Money supply, if there’s too much money in econ more spending.
FISHER EQUASION MV=PT
(M) money supply
(V) speed money is circulating the economy
(P) price level
(T) number of transactions
Effects of inflation of economic agents
Consumers - savings worth less than, save more. Debt worth less. Confidence falls. Less to spend. Living standards may fall.
Firms - less confidence and investment. Output falls. LESS COMPETITIVE, MENU COSTS.
Government- tax revenue may fall borrowing gotta go up.
Workers - may lose jobs or real wage falls. Unless INDEXATION.
Measures of unemployment comparison
IFS
Claimant count
Claimant count may not include unemployed people who have working partners, people who don’t claim due to stigma and includes people who claim fraudulently.
Whereas LFS tends to be higher.
BOTH KINDA UNDERESTIMSTE DONT INCKUDE HIDDEN UNEMPLOYED PEOPLE
- disabled people
- people who just don’t want to find work but are able to
- people who aren’t seeking but would take a job eg students
What’s underemployment
People of zero hour contracts or in jobs below skill level usually happens in recession.
Types of unemployment
- Seasonal
- Structural
More serious as long term decline falls in employment theres geogrpahical and occupational immobility leading to this unemployment. - Real wage
- Frictional
- Cyclical
Higher skill jobs as economy grows use to be jobs for people that can’t read no longer
Migration effect of employment
Increased jobs as more spending more AD and so more demand for workers in circular flow. But lower wages especially in lower skilled jobs.
Impacts of unemployment on economic agents.
Consumers - loss of income , long term unemployment means loss of skills , low job security may become redundant so wage falls and stigma
Firm’s - less supply if skills are lsot , profit falls as less consumption but offer lower wages.
Consumers - good cheaper but less choice and less to spend.
Government - less tax revenue , more spending budget deficit
Society - more crime and less national output less competitive. LRAS falls as resources aren’t in full employment ppf underatrainemnt. Fall in AD so growth low.
Why does rise in prices leads to falls in gdp
Income effect - rise in pride not immediately met with rice in income so less real income , people buy less.
Substitution effect - price rising more than abroad makes uk less competitive less abroad people buying stuff and firm can’t afford as much capital + uk people import more.
Real balance effect - saving worth less people save more
Interest rate effect - rise in price so workers want higher wages but if supply of money stays the same demand increases shifts out so price of money rises ( price of money is interest rates ) so IR rises. AD falls. but pound value grows foreigners buy pounds.
How to calc MPC
Chnage in consumption over chnage in income
How to calc MPS
Change in saving o over chnage in income
Other influence of consumption
- ER
- IR
- fashion and trends
- confidence
- wealth effect
- income distribution
