UNIT 2
Macroeconomics
, Inflation
A persistent rise in the average level of prices over a period of time
A decline in the purchasing power of money / fall in the internal purchasing power of money
- Used as an indicator to find out what is happening to prices overall – some areas might rise and some might fall
overall
- Mostly use CPI – consumer price index
A representative basket of goods is collected The basket is regularly update :
- The prices are weighted – a weight represents the proportion - Insures inflation is measure accurately
(%) of a consumers income that is spent on that basket - Changing consumer tastes
- Around 710 items go into the basket , 150 locations across - Development of new goods and services
the UK and around 100,000 prices are collected (Netflix)
Price 2019 Price 2020 Index 2019 Index 2020 Weight Weighted CPI is used by the G
Index increases in pension
and wages of the st
FOOD 50 55 100 110 40 4400
public sector
RENT 400 410 100 102.5 50 5125 Used by regulators t
CINEMA 10 14 100 140 10 1400 of utilities (gas, elec
rail)
300/3 352.5/3 10925/100
The basis of setting
100 CPI 117.5 CPI 109.25 inflation in the UK b
England
Implied rate of inflation : 17.5% BUT WEIGTED IT’S 9.25%
,Causes of Inflation Oil Prices – Oil prices are very important to in
Demand Pull – as demand increases prices also rise (caused because it is used in transport , energy and
by consumer spending , growing confidence and tax cuts) . manufacturing
Inflation caused by too much demand in an economy
Price level
Quantity Theory of Money
When incomes rise , households spend MV = PT
more. AD shifts right as more goods Expansion in supply of money subs
AS and services are demands. There is an
leads to the fall in value of money
expansion in supply as more good are
produced in response. However , in the
causes inflation
inflation
short run AS cannot fully respond to
the increase in demand and there is a M = all the money in an economy
rise in price level (inflation) V = velocity / speed at which it is ci
AD2 P = price level of all finished goods
AD economy
Real national output T – transactions ( all finished g and
Price level
economy
Cost Push – inflation caused by rising input costs AS2 AS
(rising wages , import prices up, VAT raises). Can be T doesn’t really change and neithe
associated with a contraction of demand and/or a This means that M increases prices
decline in economic activity. When input costs rise ,
in the money supply
AS curve shifts up reflecting higher input costs.
Firms raise prices because costs of production have When more money chases the sam
risen and so price levels rise. Households face a fall goods and services in an economy
in their real incomes and they buy less 0 this AD must go up
explains the contraction in demand RNO
, Cost of
Inflation
- Real incomes fall
- Real value of savings falls
- Political unpopularity as real incomes fall – strikes from workers asking for higher wages
- Redistribution – away from savers towards borrowers as real value of debt falls
- “Fiscal drag” – f inflation pushes up money wages this may drag people into a higher tax bracket
- Inflation creates inflationary expectations – once prices rise people expect them to keep rising
- Money illusion – people confuse a rise in money wages for a rise in real wages
- Exports become uncompetitive – their price has increased so demand falls
Disinflation – all of the above occurs but at a slower rate
Inflation – Friend
- Higher wages and house prices make us all feel richer – “wealth effect” people feel more confident to borrow b
think they have larger assets
- Higher prices tomorrow encourages spending today as prices may rise tomorrow
- Debts decrease
Inflation – Foe
- When a vast range of prices are rising it impedes the signaling function of the price mechanism ( we don’t know
might be changing in terms of demand/supply)
- Could cause hyperinflation
- Money loses it’s value
- May enter a wage price spiral as we all try to maintain our real incomes
- Social unrest (strikes)
- Exports become uncompetitive
Macroeconomics
, Inflation
A persistent rise in the average level of prices over a period of time
A decline in the purchasing power of money / fall in the internal purchasing power of money
- Used as an indicator to find out what is happening to prices overall – some areas might rise and some might fall
overall
- Mostly use CPI – consumer price index
A representative basket of goods is collected The basket is regularly update :
- The prices are weighted – a weight represents the proportion - Insures inflation is measure accurately
(%) of a consumers income that is spent on that basket - Changing consumer tastes
- Around 710 items go into the basket , 150 locations across - Development of new goods and services
the UK and around 100,000 prices are collected (Netflix)
Price 2019 Price 2020 Index 2019 Index 2020 Weight Weighted CPI is used by the G
Index increases in pension
and wages of the st
FOOD 50 55 100 110 40 4400
public sector
RENT 400 410 100 102.5 50 5125 Used by regulators t
CINEMA 10 14 100 140 10 1400 of utilities (gas, elec
rail)
300/3 352.5/3 10925/100
The basis of setting
100 CPI 117.5 CPI 109.25 inflation in the UK b
England
Implied rate of inflation : 17.5% BUT WEIGTED IT’S 9.25%
,Causes of Inflation Oil Prices – Oil prices are very important to in
Demand Pull – as demand increases prices also rise (caused because it is used in transport , energy and
by consumer spending , growing confidence and tax cuts) . manufacturing
Inflation caused by too much demand in an economy
Price level
Quantity Theory of Money
When incomes rise , households spend MV = PT
more. AD shifts right as more goods Expansion in supply of money subs
AS and services are demands. There is an
leads to the fall in value of money
expansion in supply as more good are
produced in response. However , in the
causes inflation
inflation
short run AS cannot fully respond to
the increase in demand and there is a M = all the money in an economy
rise in price level (inflation) V = velocity / speed at which it is ci
AD2 P = price level of all finished goods
AD economy
Real national output T – transactions ( all finished g and
Price level
economy
Cost Push – inflation caused by rising input costs AS2 AS
(rising wages , import prices up, VAT raises). Can be T doesn’t really change and neithe
associated with a contraction of demand and/or a This means that M increases prices
decline in economic activity. When input costs rise ,
in the money supply
AS curve shifts up reflecting higher input costs.
Firms raise prices because costs of production have When more money chases the sam
risen and so price levels rise. Households face a fall goods and services in an economy
in their real incomes and they buy less 0 this AD must go up
explains the contraction in demand RNO
, Cost of
Inflation
- Real incomes fall
- Real value of savings falls
- Political unpopularity as real incomes fall – strikes from workers asking for higher wages
- Redistribution – away from savers towards borrowers as real value of debt falls
- “Fiscal drag” – f inflation pushes up money wages this may drag people into a higher tax bracket
- Inflation creates inflationary expectations – once prices rise people expect them to keep rising
- Money illusion – people confuse a rise in money wages for a rise in real wages
- Exports become uncompetitive – their price has increased so demand falls
Disinflation – all of the above occurs but at a slower rate
Inflation – Friend
- Higher wages and house prices make us all feel richer – “wealth effect” people feel more confident to borrow b
think they have larger assets
- Higher prices tomorrow encourages spending today as prices may rise tomorrow
- Debts decrease
Inflation – Foe
- When a vast range of prices are rising it impedes the signaling function of the price mechanism ( we don’t know
might be changing in terms of demand/supply)
- Could cause hyperinflation
- Money loses it’s value
- May enter a wage price spiral as we all try to maintain our real incomes
- Social unrest (strikes)
- Exports become uncompetitive
