Unit 2 - The UK economy - performance and policies
Institution
PEARSON (PEARSON)
Aesthetic summary sheet for theme 2.1.2 economics (option A, inflation), great to hang up on wall and consolidate knowledge with, provides key notes for each sub-theme. I used for mock exams and it was so helpful in helping me apply knowledge and analyse which is a huge part of the exam.
Unit 2 - The UK economy - performance and policies
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Economics theme 2.1.2 Inflation Limitations of CPI in Measuring Inflation
Effect
1. Con
1. Substitution Bias
-
CPI assumes constant consumption
patterns, whereas consumers often adjust -
Understanding of Inflation, Deflation, and Disinflation their purchases in response to changing -
prices.
1. Inflation → Inflation refers to the sustained increase in the general price level of This can lead to an overestimation of
goods and services in an economy over time. It leads to a decrease in the purchasing inflation. 2. Firm
power of money.
2. Quality Changes -
2. Deflation → Deflation is the opposite of inflation, characterized by a sustained
-
decrease in the general price level. It increases the purchasing power of money but can
discourage spending and investment. - CPI may not adequately account for quality
3. Disinflation → Disinflation occurs when the rate of inflation declines but remains improvements in goods and services over
3. Gov
positive.Prices are still rising, but at a slower rate than before. time. -
- This can result in an overestimation of price
increases. -
Calculating the Rate of Inflation Using the CPI
- CPI is a widely used measure of inflation in the UK. 4. Wo
- It tracks changes in the prices of a basket of goods RPI as an Alternative Measure of Inflation
1. Retail Prices Index (RPI) -
and services purchased by an average household.
- The formula for CPI inflation is: CPI Inflation Rate - Rpi is an alternative measure of inflation in
the Uk that uses a broader range of -
= [(Current CPI - Previous CPI) / Previous CPI] ×
expenditure/data than CPI.
100.
2. Differences from CPI
- RPI tends to produce a higher inflation rate
than CPI because it includes housing costs
and uses a different formula. A surve
Causes of inflation
Weight
1. Demand-Pull Inflation
goods
- Demand-pull inflation occurs when aggregate demand exceeds The basket of goods → the basket of goods is an Measu
aggregate supply, leading to upward pressure on prices. economic theory/measure that takes into account price c
- Factors like increased consumer spending, business average individuals purchases of goods and services goods
investment, or government expenditure can contribute to in order to measure inflation and exchange rates Update
demand-pull inflation. across countries. In theory, the same basket of goods
in another country, should be able to be purchased
with the same amount of money.
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