economic influences - inflation

Question 1

what is inflation

Answer 1

• A sustained rise in the general price level

* It measures changes in prices from one year to the next

Question 2

how is inflation measured?

Answer 2

• One measurement is called the consumer price index
• It is done by analysing the cost of a basket of goods (over 700 items from multiple sellers) monthly and comparing it to the cost a year before
• 3% means prices are 3% more expensive than 12 months ago
• Money is ‘worth less’ (so wages need to rise)
• A change from 3% to 2% means prices are still rising but at a slower rate
• Target inflation is 2%

Question 3

impact of inflation

Answer 3

• Costs of production increase = increase the selling price
• If UK inflation is higher than in other countries, it will decrease the competitiveness of our goods compared to foreign goods
• The value of workers’ wages is eroded = demand higher wages
• All above linked to profit
• The value of loans is eroded (this is a good thing)
• Retained profits if kept for long periods of time become worth less (i.e. they will buy less in the future)

Question 4

cost and consequences of inflation on a business

Answer 4

• money loses loses its value
• higher interest rates = reduces economic growth = recession
• can favour borrowers