macroeconomic indicators inflation and deflation
DESCRIPTION
Key terms Inflation Deflation CPI Family Expenditure Survey Cost-push inflation Demand-pull inflation Wage-price spiral Anticipated inflation Unanticipated inflation Shoe-leather costs Benign deflation Malevolent deflationTRANSCRIPT
Macroeconomic Indicators
Inflation and Deflation
Key terms• Inflation• Deflation• CPI• Family Expenditure Survey• Cost-push inflation• Demand-pull inflation• Wage-price spiral• Anticipated inflation• Unanticipated inflation• Shoe-leather costs• Benign deflation• Malevolent deflation
• Retail Price Index (RPI)• Consumer Price Index (CPI)
– Weighted price index• Relative importance as proportion of
spending• Price index X weighting = weighted price
index
Limitations of CPI• Different population groups
experience different inflation. Not everyone is ‘average’.
• House prices not included but mortgage repayments influence spending.
• Over-estimate inflation. Prices may not reflect quality/innovations
Cost Push revisited• Causes
– Import costs– Labour costs– Indirect tax rises– Wage-price spirals
Demand Pull revisited
Quantity Theory of Money(Monetarists)
• That an increase in the money supply will lead to an increase in the price level– Fisher equation– Equation of exchange
• M x V = P x T (or MV = PY)• M = Money supply• V = the velocity of circulation• P = general price level• T = Transactions (output)• Y = RNO (real GDP)
• Velocity of circulation– The number of times a unit of currency
changes hands in a year (to buy goods and services)
– This is assumed to be constant– T and Y tend to increase slowly over
time, therefore are also assumed to be constant
– M x V = P x T if V and T (Y) are constant, a change in M will cause a change in P – inflation!
Consequences of Inflation• Competitiveness• Investment• Distribution of income• Industrial relations• Fiscal drag• Hyperinflation• Money illusion• Menu costs• Shoe-leather costs
Inflation and Index numbers
Note the micro
overlap
Add the definitions for extra marks
Include a diagram for extra marks