INFLATION KEY QUESTIONS Flashcards
What is inflation?
inflation is the increase in general price levels in an economy.
For example Prices are higher this year than last year.
What is CPI inflation?
CPI (consumer price index) is the universally accepted way to calculate inflation levels.
What are 4 steps in calculating CPI?
Step 1: Consumer expenditure survey that contains a basket of 700 goods that are the most popular.
A weighting of these goods is taken.
Step 2: prices are taken from 150 different locations across the country to gauge an average.
Step 3: % change is calculated compared to a base year .
Weights are applied to calculate an average price change.
step 4: Then this can be added to 100 to find the new index number.
Why do the items in the “basket” of goods have to be updated every year?
Because the needs and wants of consumers change over time.
If inflation is 2% in 2013 and 1% in 2014 what has happened to the price level?
What is this an example of?
The price level has increased in 2013 and increased again in 2014.
This is an example of disinflation as the rate of inflation has decreased.
Define “base year”.
Base year is the year everything is compared to (has an index number of 100).
Define “weight”
The importance of that good in the basket of goods.
Define “weighted index”
An index number where the relative importance of the item is taken into account when calculating the average change.
Why is CPI used rather than RPI?
Because CPI is universally accepted but the RPI is not.
Therefore CPI can allow for more accurate comparisons.
CPI uses geometric mean so it better for more volatile data
What is meant by deflation?
The general price levels decreasing (negative inflation)
what is disinflation?
Decrease in the rate of inflation.
The rate of inflation being 2% in one year and 1% in the next.
