Paper 2 Autumn Mock Flashcards
Define disinflation
Disinflation is the falling rate of inflation. This is when average price level is still rising, but at a slower rate
This means that goods and services are relatively cheaper than they were a year ago and the purchasing power of money has increased
In the UK, what is used to measure the rate of inflation?
Consumer Price Index (CPI)
Explain the UK measuring rate of inflation
- CPI Measures average price change; measures the household purchasing power using the Family Expenditure Survey
- Survey finds out what consumers spend their income on
- From this, a basket of goods is created
- The goods are weighted according to how much income is spent on each item e.g. petrol has higher weighting than tea
- Basket updated annually to account for changes in spending patterns
What is the UK government macroeconomic objective for inflation?
For the inflation rate to be at 2% + or - 1 % (3% or 1%)
Define inflation
The sustained increase in the general price level of goods and services in an economy over time
Formula for CPI
Current CPI - Previous CPI / Previous CPI ( X 100)
Give the limitations of using CPI
- CPI may not adequately account for quality improvements in goods and services over time; result in overestimation of inflation
- only representative of the average household
- hard to make historical comparisons - time lag
Define devaluation
When the value of currency is officially lowered in a fixed exchnage rate system
What are the costs and benefits to devaluing the currency?
Benefits
- makes exports cheaper, making them more affordable and competitive in international markets
- increase economic growth by stimulating exports
- improves the current account as exports increase and imports become more expensive
Costs
- Inflation likely to increase as imports are more expensive, leading to demand-pull inflation
- Government and central bank may not accurately predict the ideal currency value, potentially disrupting the balance of payments
- holding large reserves of foreign currency to maintain a devalued currency may be costly and challenging
Define the balance of payments
A record of all the economic transactions between a country and the rest of the world.
Divided into two sections; the current account and the capital and financial account