91222 inflation Flashcards
inflation
a sustained increase in the general price level
deflation
a fall in general price level
hyper inflation
an incredibly high rate of inflation
general price level
an average of all prices in the economy measured by an index
general or persistant price rise
an increase in the average of all prices in the economy measured by an index such as CPI
indivdual price rise
an increase in the market price of a single product
purchasing power
inflation reduces the purchasing power of money ( you cannot buy as much for the same amount in $ )
purchasing power is the amount of goods your income will pay
nominal value
the value in current year dollars
unjusted rate or current price without taking inflation or other factors into account
real value
the nominal value adjusted for the effect of inflation
disinflation
a slowing rate of increase in the general price level
CPI
consumer price index
the measured change in the price level of a basket of goods and services purchased by households. type of index allowing us to calculate the rate of inflation.
price index numbers
takes prices from a large bundle of goods and calculates an index number and gives us a indication of prices if inflation or deflation is occuring
weighted price index
CPI uses weighting process
each item in the CPI has a different influence over the final score depending on its importance to households. determined by the fraction of total spending on that item.
eg households spend 17% of their income on food so food makes up 17% of their final price index CPI.
using index values to work out inflation rate and formula
inflation is calculated by one period to another not from base year.
formula
= % change = new - old / old x 100
limitations of CPI
fails to include prices of goods that are diffcult to measure eg second hand goods
measures the average household but what is the average household
spending patterns changing constantly
many goods change desgin quality and performance
accepted internatianlly but other countries weighing of goods differ
other price indexs
producer price index - measures cost of production
food price index - measures rate of price change in food and food services
capital goods price index- measures inflation in terms of capital goods
Nominal GDP
quantity of goods and services
X
price of goods and services
GDP = PXQ in current dollar terms shows the acutal amount you pay now
Real GDP
nominal GDP / price index ( CPI ) X 100 ( base year index )
constant dollar terms the effect of inflation taken out best to use comparison from year to year
Real GDP per capita
REAL GDP/ POPULATION
shows obtained measure of economic output per person as an indicator of average standard of living in a country
perfered measure since it accounts for diffrence sizes in population meaning more calculated standard of living and economic well being of indivduals in a country
Nominal wage
the acutal amount the producer pays for labour impacting costs of production AS
Real value
the purchasing power of wages for consumers adjusted for inflation
nominal wage rise - inflation rate = real wage rise
effects of inflation of C+I+G+(X-M)
firms - production costs rise business confidence decreases, difficult to plan difficult to reproduce outset/put
housesholds - income causes fiscal drag consumption decrease interest rates rise savers may benefit
goverment - welfare payments rise taxes decrease costs rise
( X-M) - imports increase as cheaper to buy assuming trading partners do not have inflation exports become more difficult.
effects of inflation
cost of living rises, interest rates rise, borrowers have higher re payments, savers recieve more interest = cost of living rises.
if inflation os higher than interest rate purchasing power decreases
fiscal drag
a slowing in the growth of the economy caused by a lack of spending as increased taxation slows the demand for goods and services.
inflation more depth defintion
Inflation is an increase is the general price level of a nation over a period of time, usually a year. Inflation means the average level of prices is rising and a dollar will buy less now compared with a previous time period i.e. the purchasing power of the dollar is falling.
deflation more depth defintition
Deflation is a decrease in the general price level of a nation over a period of time, usually a year. Deflation means the average level of prices is decreasing and a dollar will buy more now compared with a previous time period i.e. the purchasing power of the dollar is increasing.
