2.2 inflation Flashcards
What is inflation?
Give an example?
Inflation= the rate of increase in the general price level in an economy.
General prices are more expensive this year than last year.
What is deflation?
give an example?
Deflation- is the rate of decrease in the general price level of the economy.
When prices were higher last this year than this year.
What is disinflation?
Disinflation- a fall in the rate of inflation.
What is the CPI?
How is it calculated? 3 steps
Consumer Price Index.
1- (EXPENDITURE SURVEY) Step 1- Annual consumer expenditure survey
it contains 700 goods which are the most popular.
(the weighting of each product is taken)
2-(LOCATION SURVEY) Step 2- Prices of each product in the basket of goods are taken in different locations of the country.
3- (CALCULATE) apply the weights to calculate an average price change, this number is added to 100 to get the index number.
How do you work out an index number?
New raw number/ base raw number.
How would you calculate Real GDP per capita?
Nominal GDP - Rate of inflation - growth in population.
What are the limitations of using CPI ( 3 reasons)
CPI may not be fully representative. As university household may not be like every household.
CPI does not measure the quality of product as the quality could make the price higher.
If there is a new innovation it could decrease the price and make it seem like deflation.
What is RPI
what are its defining factors) (4
RPI is retail price index.
1-It includes mortgage interest payment and council tax
2-RPI uses arithmetic mean rather than the geometric mean of (CPI).
3-Excludes the highest earners and pensioners (CPI includes this.
4-RPI is not internationally comparable (CPI is is)
What are the different types of inflation and what are they?
Demand pull inflation- this is when aggregate demand increases unsustainably so there is more pressure on resources so producers increase prices.
Cost push inflation- this is when aggregate supply increases so production costs increase. (When firms face rising costs). (cost of raw materials increase such as when oil rises.)
Growth in the supply of money- some economists argue inflation happens when there is a larger supply of money.
Large increases in the supply of money can even cause hyper inflation.
What are the limitations of CPI?
CPI Is for a typical household.
Different demographics have different spending patterns.
CPI is slow to respond to new goods and services, even though it is updated regularly.
Sometimes an innovation can make production costs decrease which could make it seem like deflation.
What is the effect of inflation on consumers?
Those on low-fixed incomes are hardest hit as necessities become more expensive.
If consumers have loans the amount owed does not increase with inflation, so the real value of debt decreases.
What is the effect of inflation on firms?
Firms will have to take out loans to invest, interest is likely to be higher on loans. So less businesses may invest.
Workers may ask for higher wages to compensate for inflation which may increase costs of production.
Firms may be less competitive on an international scale.
What is the effect of inflation on government?
Governments will have to increase welfare state pensions and benefits as cost of living has increased.
What is the effect of inflation on workers?
There may be more redundancies as firms are faced with higher costs.
Real incomes fall with inflation so workers will have less disposable income.
