2.1.2 Inflation Flashcards
Define inflation
Inflation is the gradual increase in price over time.
What is meant by CPI inflation?
Consumer Price Index is used to measure inflation in an economy and it is used by the Bank of England to set inflation rates.
Explain at least 4 steps in the calculation of CPI
1) There is a consumer expenditure survey which is conducted annually and decides which 700 items are added to the basket of goods that symbolise the whole market of goods.
2) A price survey is conducted (100,000 prices collected) monthly from 150 UK locations.
3) The percentage change in price is calculated compared to a base year. Then the weight of the good is calculated by identifying the percentage of income spent on each good.
4) This weight is then applied and added to 100 to find the new index number and determine the new price.
Why do items in the ‘basket’ of goods have to be updated each year?
Because some goods could become outdated, for example, if it wasn’t updated each year then the MP3 would still be in it despite them not being anywhere near as popular now as they used to be. It is similar for many technological products.
If inflation is 2% in 2013 and 1% in 2014, what has happened to the price level?
The price level has increased at a slower rate: disinflation.
Define ‘base year’
A base year is represented by the number 100 and is a year that data is compared to when trying to calculate the index number.
Define ‘weight’
Weight is the relative importance of a good. For example in a price index the weight depends on the % of total spending on the good.
Define ‘weighted index’
Weighted index is an index number where the relative importance of the good is taken into account when calculating the average change.
Why is CPI rather than RPI used as the main measure of inflation in the UK?
Because CPI is internationally comparable and RPI (retail price index) isn’t.
What is meant by deflation?
The gradual decrease in the general price level over time.
What is meant by disinflation?
The decrease in the rate of inflation.
