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Similar to inflation 10.ppt
Similar to inflation 10.ppt (20)
inflation 10.ppt
- 2. © Edco 2012. Positive Economics
Inflation is defined as a steady and persistent
increase in the general level of prices. It’s the
rate at which your money loses its ability to
buy things.
Inflation
- 3. © Edco 2012. Positive Economics
Simple price index:
Price in any year
Price in base year x 100
Measuring Inflation
- 4. © Edco 2012. Positive Economics
Five Steps to Create a
Composite Price Index
Choose a base year and let all the prices equal 100.
Select the goods and find the prices for all goods in
all years.
Construct a simple price index for each good.
Multiply the simple price index by the weight
(proportion of income spent on the good).
Add to get the composite price index for the
current year.
- 5. © Edco 2012. Positive Economics
The consumer price index is the official
measure of inflation in Ireland. It measures the
price changes of goods and services typically
consumed by all consumers living in rural/urban
areas, high-/low-income earners and from all age
groups. It is a price index that shows the current
cost of purchasing the same identical basket of
goods with the base year (starting point).
Consumer Price Index (CPI)
- 6. © Edco 2012. Positive Economics
What are the Economic Uses of
the Consumer Price Index?
Measures the rate of inflation
International comparisons
Indicator of the country’s/government’s
performance
Indexation of savings and investments
Used in wage negotiations
Used by government to index tax bands
- 7. © Edco 2012. Positive Economics
What Precautions Should be
Taken When Using the CPI?
An index of the average consumer
Not a cost of living index
Lags behind consumer trends and fashions
Static weights
Quality changes in products
Substitution of products
- 8. © Edco 2012. Positive Economics
What Factors Cause Inflation?
Demand pull factors
Cost push factors
Imported inflation
Government-induced inflation
- 9. © Edco 2012. Positive Economics
What Remedies are Available?
Fiscal policy
Monetary policy
Partnership agreements
- 10. © Edco 2012. Positive Economics
What Problems are Caused by
High Inflation?
Lower standard of living
Speculation is encouraged
Borrowing is encouraged
Wage demands
Loss of international competitiveness
Saving is discouraged
Difficulty attracting foreign direct investment
Increase in unemployment
- 11. © Edco 2012. Positive Economics
Deflation happens when there is a general
decrease in the average level of prices. This
sounds great, but it can damage an economy. If
all prices are steadily declining, then consumers
may postpone buying goods and services,
expecting it to cost less a week later and less
again a month later, causing consumer demand to
fall and thus affecting employment and growth
(e.g. house prices at present in Ireland). Likewise,
a company might postpone investing and the
economy would suffer.
Deflation
- 12. © Edco 2012. Positive Economics
Benefits of Price Stability
Consumers will tend to spend, generating demand for
goods and services and hence employment,
contributing to economic growth.
The demand for wage increases won’t be as urgent
given that workers’ purchasing power isn’t falling. This
in turn keeps costs stable and companies may decide
to increase investment given that they are able to
plan more effectively.
- 13. © Edco 2012. Positive Economics
Benefits of Price Stability cont.
Old-age pensioners and those on fixed pensions
will see their purchasing power being maintained
and will be able to manage better.
Savings in the economy may increase, leading to
investment (if the rate of inflation is less than the
rate of interest).
Government revenues could increase with more
indirect and direct taxes being collected due to
increased numbers of people working and
spending.
- 14. © Edco 2012. Positive Economics
The constant tax price index is a price index
that keeps the indirect tax part of a price increase
constant. The main use of this index is in wage
negotiations. It will reduce the possibility of
employees getting wage increases to compensate
for increases in taxation.
Constant Tax Price Index