Inflation Flashcards
Inflation
Sustained general increase in price lvl
Deflation
Sustained general decrease in price lvl
Disinfection
Decrease in the rate of inflation
Hyperinflation
Very high inflation lvl
Stagflation
Increase/very high inflation lvl when economys in recession
Deflationary policies
Policies designed to lower rate of econ growth
Inflation rate calculation
Avg price / time … diff in index no. / time
(Yr 2 - Yr 1 / Yr 1 ) x 100
CPI steps
1) have a basket
- representative range og g/s calc from living cost & food survey
- households record expenditure on diff g/s to calc avg
2) weighted
- prices g/s weighted based on % of income
- weighted prices added to give total weighted prices of basket
3) base Yr
- choose base year: Yr chosen as a good comparison in a series of data
- weighted basket convert into index no.
4) calculate
- index no. = (raw no. / base Yr raw no.) X 100
CPI Cons
● not representatives
- don’t take into account every g/s sold in the county
● ‘avg family’
- personal inflation rate differ eg high income = holidays higher weight & low income = bus fair high weight
● no hosing cost
- don’t inclu date … lower fig than it should
Types of inflation
Demand pull inflation: inflation caused by an increase in AD
Cost push inflation: inflation caused by an decrease in AS
Demand pull inflation causes
- decrease interest rates
- decrease tax ( income & corporation)
- increase gov spending
- weak ex. Rate (WPIDEC)
Cost push inflation causes
- increase wage rate
-increase raw material price bc increase M price - increase price to increase profit
- decrease gov subsidy
- increase corporation tax
Inflation cons
● consumer
- erosion of savings : interest rate don’t increase at same rate as inflation … unemployed & retired lose out
- shoe leather cost : opportunity cost … c don’t kno what’s reasonable price … takes time to search for better gs - could be working
● producer
- decrease x competitiveness : if value of £ don’t change on foreign currency markets … SPICED
- menu cost : restaurant/shops/firms need to change price label & need to calc new price list
- wage spirals : Workers ask for higher pay … increase CofP … increase prices of g/s … increase pay
Inflation pros
● gov
- low stable inflation 2% +/-1% : room to adjust economy If inflation is higher/lower
Eg - o.5% = increase AD
4% = decrease AD
EVAL points
- CPI … internationally recognised method of calc inflation
Good inflation
AS of g/s increase faster than AD … decrease price
Bad inflation
AD of g/s decrease faster than any growth in AS
