Download Topic 2.1.2 Inflation student version1

Inflation as a way to measure
performance of developed and
developing countries
2.1.2 Unit content
Students should be able to:
• Define inflation, deflation and disinflation
• Explain how inflation is calculated in the UK
(CPI) and the limitations
• Analyze the RPI as an alternative to CPI
• Assess the causes of inflation (demand pull,
cost push and growth of the money supply)
• Evaluate the effects of inflation on consumers,
firms, the government and workers
Definitions
What is inflation?
• Inflation is the p_________ i_________ in the level of
p________ over time
What does the annual rate of inflation show?
• It shows how much h_______ or l_______ prices are
compared with the same month a y______ earlier.
• It indicates changes to our ________________
What does it mean if the inflation rate is 2% in August?
• This means that prices are _% higher than they were a
_________________
How is inflation measured?
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•
Inflation is measured by the annual change in
the Retail Price Index (RPI) and the
Consumer Price Index (CPI).
The RPI is a basket of goods and services
consumed by most households.
The CPI is a similar (European) measure
which excludes ___________ costs such as
mortgage payments and council tax.
We mostly use the CPI now (and this is what
Edexcel assume!)
How is inflation calculated?
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Inflation is calculated by the Office for National
Statistics (ONS), they look at the changes in the
prices of ____ goods and services (March 2015) in
_______ different areas across the UK (& online).
This is known as the basket of goods and is updated
annually to reflect changes in the things we buy.
Items are weighted to reflect how much we spend on
them (i.e. to reflect their relative importance) e.g. we
spend more on petrol than postage stamps so fuel
has a weight of ___% in the RPI.
Examples of goods in the basket
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The basket of goods is updated annually to
reflect changes in the things we buy.
Hence the recent inclusion of ___________
and the exclusion of _______________
What are weaknesses of the measures?
Current figures: What is inflation in the UK at the moment?
CPI rose to _____ in November 2015, from ____ in
October. The average for the year was _____
Examples 1981 versus 2011
From 1981 to 2011 inflation has risen 209%.
If inflation was the only factor that changed
prices, how much would the following cost?
Product
1981 prices
Inflation
2011 prices
Actual
2011 prices
Big Mac
89p
£2.49
Glastonbury
ticket
£8
£195
Coca cola
(1.25 litres)
59p
£1.50
Cinema
ticket
£1.75
£9.50
HINT: If inflation was 9% we would multiply by
1 + 9% = 1 + 0.09 = 1.09
Inflation and the government (see 2.6)
In the UK the government has set a
target of _____ % for inflation
In _____, ______________gave the
Bank of England responsibility to ensure
the target is met.
What causes inflation?
There are three causes:
1. cost push
2. demand pull
3. growth of the money supply
Why might costs rise?
Why might demand rise?
High inflation
What happens to prices during a period of high
inflation?
Who benefits from high inflation? Why?
Deflation
What is deflation?
Benefits?
Why is deflation a problem?
What is disinflation?
Disinflation is a __________ in the rate of
inflation.
Why does the government want low inflation?
Other measures of inflation - RPIX
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We know that RPI measures the average price
of a typical ‘basket of goods’ bought by the
average household.
RPIX is similar to RPI but it excludes mortgage
payments. This is particularly useful if house
prices are volatile (changing rapidly).
Interpreting index numbers
An index number shows the rate of
change in price, quantity or value of an
item or group of items over a period of time
An index number is a ___________ which
gives the value or size of a quantity relative
to a standard number, or base.