INFLATION
Shows the general level of prices within an economy
INFLATION – the fall in purchasing power of money (when prices rise and
currency becomes more and more worthless) Power of currency becomes
less powerful.
DEFLATION – a rise in purchasing power of money (the decrease in the
general level of prices- when prices fall and currency has more value).
Power of currency becomes more powerful.
CPI – consumer price index is used to measure inflation/peoples real incomes– it
uses 600 to 700 businesses who produce the most commonly used
goods/services, used by most UK households, and then tracks whether they are
rising or falling in price as one whole unit, they then compare this value to the
unit before/ the previous valuation of the CPI.
Real income – measures what you can buy with your income.
e.g. if inflation rises by 2% and your income rises by 2% your real income
has remained the same.
If income increases by more than inflation, your real income raises by that
difference.
Inflation can be considered a good thing as it shows that businesses (increase
their prices as they are confident that economy is going to grow in the short
term.) and consumers (spend their money on goods and services as they are
confident that economy is growing) are confident in how the economy is
developing.
A 2% increase in CPI is considered good as it shows a healthy and stable growth-
as prices increase, people’s incomes can rise at that same kind of level- people
can continue to sustain/ improve the same standard of living that they were
previously-but consumers wages tend to not change regularly, whilst businesses
can increase their prices whenever.
Inflation is bad when it grows too rapidly – prices inside the economy rise
too quickly, and incomes can’t sustain this rapid growth, therefore people
can’t sustain the standard of living, which is bad for consumers and could
have a knock-on effect on businesses.
Businesses have to make a decision when inflation occurs:
Inflation increases a business’s costs (as there is a general rise in
the prices) –
many firms increase their price, risk of demand decreasing,
sales decrease, falls in market share, effect economies of
scale they are benefiting from.
many firms keep prices the same to stop consumers being
affected- but their profit margins will be affected negatively.
Inflation causes demand for a business’s goods/service to decrease
(as the price gets higher and incomes aren’t able to keep up,
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