Inflation Flashcards
What is an economic indicators?
An economic indicator is economic data, that is usually use in microeconomics to interpret and analyse the future situation of an economy, to analyse the overall health of an economy
What is inflation?
Inflation happens when the majority of the prices of goods and services rise in a persistent way. This is because the value of a currency decreases and purchasing power fails
What is deflation?
Deflation is the persistent decline of the general level of prices of goods and services in an economy.
Who measures inflation in Malta
The National statistics office (NSO)
Name two common in this is used to calculate inflation
Retail price index (RPI)
Harmonised indices of consumer prices (HICP)
Give the process of measuring inflation in Malta
- Selecting the basket of goods and services. (a representative basket of goods and services.)
- Collecting price data.
- Calculating the index. (CPI)
- Weight updates (weights assigned to different items in the basket are periodically updated to reflect changes in spending patterns)
- Inflation rate reporting
Give the formula for calculating the inflation rate
Change in value
Percentage= ———————- x 100
Original value
HICP 2 - HICP 1 Inflation % = ———————- x 100
HICP 1
Distinguish between RPI and HICP
- RPI is specific to the UK and Malta whilst HICP is used across the whole of the EU.
- RPI includes a broad range of housing costs whilst HICP typically includes only house related costs like rent and utilities, but not other payments.
- RPI uses the “Carli index” formula, whilst HICP uses “jevons index”, making HICP more favourable.
What are the two main causes of inflation?
Demand AND supply
- Demand-pull inflation.
- Cost push inflation.
What is demand pull inflation?
This happens when aggregate demand is persistently greater than aggregate supply at current prices, so the general price level is “pulled up” in the same way as the first law of the market
What is cost push inflation?
This is created when businesses increase prices to cover the increase in production cost
Explain the effects of inflation on the households
- Purchasing power decreases.
- Wages are worth less
- Real value savings decrease over time.
- Borrowers tend to gain
Explain the effects of inflation on businesses
Demand, pull inflation ;)
1. Increased revenue.
2. Potential for higher profits.
3. Increased production due to more resources allocated to meet higher demand.
Cost push inflation :(
1. Reduced profit margins.
2. Competitiveness.
