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Summary AS Notes Economics Unit 2 Inflation
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AS Notes Economics Unit 2 Inflation Revision Notes
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Inflationrise in generalprice level in an economy over a period of time lowering the value of
the money causing uncertainty
measured by rise in prices over a period of time through
Consumer Price Index CPI
a measure andservices updated regularly
of average price level ofgoods
measures changes to the price level of basket of goods
price survey approximately 7000 households
ofthe
Components in basket are updated annually
used to compare with other countries in EU
Not totally representative can not take account of every single good
Does not include housing prices
Retail Price Index RPI
older measure of inflation
calculated cost of living and
wage changes
not considered to be official inflation rate by government
more accurate measure of inflation as it includes housing prices
can not compare with other countries in EU
RPI excludes average households excludes top 4
of income earners and lowincomepension
family Expenditure Survey fES
changes in cost of buying a basket of goods
ex emote spending on popcorn
average cost of electricity
in
3 inflation
rising Disinyay
Disinflation reduction in therate of inflation
s
i
2
Deflation
Deflation
fall in generalprice level inan economy over a period
of time increasing the value of
the money
worse than inflation as when prices fall consumers wait for future lower
prices this reduces demand and growth
Moreover business recieve lower profit as prices
of their goods fall so reduce
their investment
Causes
of inflation
two causes
Demand pull inflation AD Ct I 1Gt X M Cost push inflation
occurs when ADshifts to the right occurs when cost of factorof
when consumers confidence rise production goods services rise
increasing spending shitting AS to the left
firms feel more confident when imports increase in price
, I feel m c f l when mp Is increase in p Ce
increasing investment price of raw materials causing
government increases spending firms to 9 prices
higher demand for exports higher wage
price
Level
t productivity 9 averagecosts
As 9 taxes
qPz Priffel n Asa
Pe AS
I 1
I
I 1 AD ADZ qpz t
Real p s
Yi 42 1 I
GDP l l
AD
l 1l
Problem Wage k 41 Real
price spiral e GDP
workers can expect to
get higher wages when Priefein
As
prices rise
although if theirproductivity
remained the same then µre i
wage rise may act as I 1 ADAM
Real
ya k
fuel for furtherinflation one
due to 9disposableincomeMonsumption 9prices
Inflation proskons
Advantages Disadvantages
Debts become relatively
smaller19disposableincome Rising prices
Relative wages can be adjusted Value of money is erodedd livingstandards
government will start monitoring Falling value of savings
the wage so those earning low Reduce international competitiveness
income will have higher rise It wages don't keep up lower
in wage than high income earners real wages
Relative prices can change Creates uncertainty and lowerinvestment
Enables economic growth
during deflation ADD recession
Hyperinflation
where price rises are exceptionally high
price rises of more than 50 a month
Deflation proskons
Advantages
Prices
of goods1services t
Central banks lower interestrates to boost AD
Real income 9
09international competitiveness 9exports ddeficit
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