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LC Econ Price Levels
LC Economics Price Levels (Inflation-CPI)
| Question | Answer |
|---|---|
| Inflation | An increase in prices of goods and services over a period of time. |
| Simple Price Index | This is an index constructed to measure changes in the price of one product only. Formula for calculating Simple Price Index: Price in any year / price in base year x 100 |
| base year | a starting date from which the change in price is measured |
| The Composite Price Index | This is an index constructed to measure changes in the prices of several products |
| weight | the percentage of income spent on a good |
| CPI | Consumer Price Index |
| Consumer Price Index | It measures the changes in the prices paid by averages households for consuming goods and services |
| National Average Family Shopping Basket | Those items which the average Irish family buys frequently and in large quantities are included. |
| Household Budget Inquiry | survey carried out by the CSO to find out the percentage of income which people spend on various goods and services |
| Creeping inflation | this is where a country is experiencing a low steady rate of annual increasing price levels e.g. less than 5% per annum |
| Rapid inflation | this is where a country is experiencing a significant annual increase in general price levels e.g. over 8% per annum |
| Hyper-inflation | this is where a country is experiencing a huge annual increase in price levels which rapidly erodes the purchasing power of money and undermines confidence in the domestic currency |
| Demand pull inflation | This is when the total demand for goods and services is greater than the total supply of goods and services available for sale |
| Cost push inflation | This is when the general price level is pushed up by increases in the costs of production. The costs increased are passed on to consumers |
| Government caused inflation | Inflation is a rise in prices as a result of some action by the government |
| Deflation | It exists when total demand is less than total supply e.g. falling prices |
| Deflationary Policies | "reduce consumer spending, reduce government spending, limit wage increases" |
| How to control Demand Pull inflation | Increase direct taxes, introduce credit controls, increase interest rates, reduce government expenditure, increase supply. |
| How to control Cost Push Inflation | Link wages to productivity, implement price and incomes policy (set a maximum price), decrease indirect taxes, national wage agreements, increase the cost of imports. |
| Constant Tax Price Index | Omits price increases due to increases in indirect taxes when compiling the CPI. It will then show how much of the overall price change in any period is due to indirect taxes and how much is due to all other factors. |
| The EU Harmonised Index of Consumer Prices (HICP) | Index that calculates each member state of the EU to allow comparison of consumer price trends in the various member states. It excludes mortgage interest but includes personal expenditure of tourists within each country. |
| The Agricultural Output Price Index | measures changes in the prices of agricultural output |
| The Agricultural input Price Index | measures changes in the prices of agricultural inputs such as, feeding stuffs, fertilisers and seeds. |
| The Import Price Index | measures changes in the prices of our imports. |
| The Export Price Index | measures changes in the prices of our exports. |
| Problems with inflation 2 | if interest rates > inflation borrowing increases, Balance of Trade (exports more expensive, imports cheaper), people on fixed incomes suffer, increased speculation (e.g. property), creates uncertainty, increase in interest rates from ECB. |
| Uses of CPI | measures official rate of inflation, basis for claims on wages and social welfare benefits, used as economic indicator, Assesses price competitiveness on the international market, basis to set interest rates (interest rates > inflation encourages saving) |
| Limits of CPI | Limited range of products (12 categories), doesn't include new products , Weightings get distorted overtime, Based on 'average' household, no difference between rural and urban, no allowance for indirect taxation, doesn't account the quality of goods. |
| What factors cause inflation? | Demand pull factors, Cost push factors, imported inflation, government-induced inflation. |
| What Problems are Caused by High Inflation? | Lower standard of living, Speculation encouraged, Wage demands, Loss of competitiveness, Saving discouraged, Borrowing encouraged, Difficulty attracting FDI, Increased unemployment, uncertainty, BoT exports more expensive, imports cheaper |
Created by:
MrFromholz
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