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Lecture 7 summary
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Summary of 8 pages for the course EKN 320 at UP (Lecture 7 summary)
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Lecture 7Inflation
Index numbers:
- Inflation → sustained increase in the general price level
o Measures the change in cost of living
o Primary objective of SARB → to achieve and maintain price stability in the
interest of balanced and sustainable economic growth in South Africa
o Problems of high inflation:
▪ Impacts on price stability
▪ Erodes purchasing power of money
▪ Reduces yields
▪ Destabilising effects on fiscal objectives
▪ Hampers investor confidence
▪ “Shoe leather costs”; menu costs
- Index → series of index numbers with fixed frequency
o E.g month, quarter, year
- Specific index → contains a single compoenet/variable
o E.g an index of maize production
- General/composite index → obtained by combining various variables or specific
indices in one index
o E.g an index of industrial production or the CPI
o Construction steps:
▪ Choice of items or components (basket/regimen)
▪ Choice of base period
▪ Assignment of weight to different items or components
▪ Collection of data
▪ Calculation of the index numbers
- Choice of items included in the basket/regimen
o Included in general/composite index is crucial
o Choice of items usually depends on the relative significance of each
potential item and its measurability
- Choice of base period:
o Reference point of any index → normally set to 100
o Criteria for base year:
▪ Should be relatively recent → as many as possible index
compenents have to be included in the base and current period.
• More recent base year = more compareble current figures
are with the base period.
▪ Falls in an economically stable/normal period
• Abnormal periods (periods of abnorlaly high/lwo inflation or
economic growth) should be avoided → distort index
▪ Common base year
▪ Census, survey or sample year are often used as base years →
comprehensive data is already avalable for relevent variables
Notes can only be purchased through the following details:
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, - Assignment of weights to different items:
o Assign weight to each item according to relative importance → spending is
not equal on everything in the basket → weight indicate the importance of
the good to the consumers
o Price index → weight determined by spending patterns
o Should add up to 1 or 100
o Paasche vs. Laspeyres vs. Fisher methods
▪ Paasche → when comparing current values to base period – use
current quantities
▪ Laspeyres → when comparing current values to base period – use
base period quantities
▪ Fisher → average of Paasche and Laspeyres
o CPI → uses the Laspeyres index with weights based on IES (income
expenditure survey) and LCS (living conditions survey)
o SA uses the Laspeyres index
- Collection of data
o Frequency of collection of prices increases if goods prices change more
frequently → depends on specific index
o CPI → stats SA field workers sample retail stores each month; head office
collects service data → also extenede to the infromal sector (street vendors
and spaza shops)
o Prices are collected during the first three weeks of the month
o Prices collected monthly:
▪ Almost all goods: Food, tobacco products, clothing, petrol, etc.
o Prices collected quarterly
▪ Rent, public transport tariffs, etc.
o Prices collected annually
▪ Doctor’s fees, university/school fees, toll fees, etc.
o Prices collected at different intervals → changes are usually recorded when
the prices change (these prices do not change at any set interval)
▪ Water, electricity, etc.
o Revision of CPI
▪ Revised in 2016 (previous revision was 2012)
▪ Significant changes to consumer basket of goods and services
based on the LCS of 2014/2015
• Larger weights → applied to food, recreational and cultural
services
• Smaller weights → transport, education, restaurants and
hotels
• New food items → savoury biscuits, rusks, instant noodles,
frozen pastry products (pizza or pies), hot cereals (porridge),
ready-mix flour, chicken giblets, corned beef, beef offal,
mutton offal, pears – fresh, peanuts, chewing gum.
• Other new items → household items (coffee mug, sheet &
pillow case, sandwich maker/ toaster, cooking pot).
• Items removed: portable radio/CD players, green laundry
soap, candles and firewood.
Notes can only be purchased through the following details:
gorgataylor@gmail.com or 0829369077 2
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