2.1.2 Inflation Flashcards
what is inflation?
a sustaned increase in the general price level
how is the rate of inflation measured?
- price level data is converted into consumer price index
index= current (price level) / base number (price level) - from this you can easily clauclate intrest rates change using the percentage change formula
calculating inflation rate
what is disinfaltion?
- infaltion rate is still incraesing (positive)
- BUT the rate is less than last year
- inflation rate is falling
the price level continues to rise but by a smaller percentage
what is deflation?
- where the inflation rate is negative
- price levels are actually going down
what are the three stages in calculating the UK’s price level?
- the ONS conducts it’s living costs and Food survey. This involves interviewing 7000 households to find 650 most common goods and services
- the ONS conducts a price survey where they collect the prices of these 650 goods from across the UK in order to find an average price level
- a weighted average of all the prices is calculated to find the price level
what are the problems with CPI as a measure of standard of living?
- unusual spending habits
- changes in quality
- lag time
- doesn’y include mortages
why are unusual spending habits a problem with CPI?
- the 650 basket of goods “most common goods and services” are only accounted for by the average consumer, not weirdos
- buying uncommon goods and services whicch may not be accounted for
why is time lag a problem with CPI?
- CPI basket is only updated every year
- therefore will not acknowlege price changes in new goods and services
- however consumer cost of living is imapcted almost immediatly
why are changes in quality a problem with CPI?
prices could be increaseing duento an increase in quality rather than inflation
what is the working age population?
people between 16 and 64 yeas
what is the difference between the inactive and active population?
aka economically inactive/active
inactive: are not able to work, are not activley seeking work (inheritance, uni students, disabled)
active: are able to work, are activly seeking for work, cureently working (workforce)
what is the difference between RPI and CPI?
- RPI includes mortgage repayments (unlike CPI)
what are the two types of inflation?
- demand pull
- cost push
What is demand pull inflation?
When AD increases, causing the price level to rise
what is cost push inflation?
when the costs of production increase –> SRAS shifts to the left
only occurs with SRAS (costs of production)
what is hyper inflation?
when inflation reaches above 50% per month
what is a deflationary spiral?
- deflation occurs first, price levels decrease
- consumers delay their purchases and instead save- in hope for prices to drop even lower
- lack of consu,ption causes AD to shift to the left
- after repeated cycles of this, real GPD decreases and unemplyment increases
what are the causes of deflation?
- increase in AS
- decrease in AD
sustained decrease in general price level
how do inflation and deflation affect the value of money?
- inflation: decraeses the value of money (can buy less goods with £1)
- deflation: increases the value of the money (can buy more goods with £1)
how do you calculate inflation rate?
(new- original/original) 100
what are the 3 stages to calculating the UKs price level?
- Office of national statstics interviews 7000 households to find the 650 most common goods and services
- price survey is conducted to find the average price level
- a weighted price level of all the prices is calculated in order to find the price level
how do you calculate weighted average?
average price × % of total spending
what is the formula for consumer price index?
what is a price wage spiral?
- due to inflation prices rise
- cost of living rises
- workers demand higher wages
- increasing cost of production for firms–>SRAS shifts to the left
- increase in price level
eventually can lead to hyperinflation
what are the benefits of inflation?
- no risk of deflationary spiral
- reduces the real value of debt—> improves inequality (better for the poor)
what are the cons of inflation?
- risk of price wage spiral —> hyperinflation
- reduces the real value of savings
define inflation
an increase in the general price level of goods/services with an economy resulting in a decrease in the purchasing power of money
define deflation
a decrease in the general price level of goods/services within an economy resulting in an increase in the purchasing power of money
define disinflation
a decrease in the rate of inflation (the general price level is increasing, but at a slower rate than before)
define consumer price index
the official measure used to calculate inflation , using a weighted basket of goods
define demand pull inflatiom
inflation caused by an increase in AD
define cost push inflation
inflation caused by an decrease in AS
