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Inflation
- The Cost of Inflation
- Shoe-Leather Costs
- 'Shopping around'
- 'Shopping around'
- Menu Costs
- If there is inflation, restaurants have to
change their menus to show increased
prices. Similarly, to shops, ect
- If there is inflation, restaurants have to
change their menus to show increased
prices. Similarly, to shops, ect
- Psychological and Political Costs
- People feel they are worse off,
even if their incomes rise by
more than the rate of inflation
- People feel they are worse off,
even if their incomes rise by
more than the rate of inflation
- Unemployment and Growth
- Inflation increases
costs of production and
creates uncertainty
- This lowers the profitability of investment and
makes businessmen less willing to take the
risks associated with any investment project
- This lowers the profitability of investment and
makes businessmen less willing to take the
risks associated with any investment project
- Inflation increases
costs of production and
creates uncertainty
- Re-distributional Costs
- Inflation can redistribute
income and wealth
between households,
firms and the state
- Inflation can redistribute
income and wealth
between households,
firms and the state
- Shoe-Leather Costs
- The Causes of Inflation
- Demand-Pull Inflation
- If AD rises and there is
no increase in AS. This
could be caused by
- Consumer spending may rise excessively
- Firms may substantially increase
their investment spending
- World demand for UK exports
may be rising because of a
boom in the economy
- The government may be increasing
its spending, or cutting taxes
- Consumer spending may rise excessively
- If AD rises and there is
no increase in AS. This
could be caused by
- Cost-Push Inflation
- Occurs because
of rising costs
- Imports can rise in price
- Profits can be
increased by firms
when they raise price to
improve profit margins
- Wages/Salaries account for 70% of
national income and hence increases in
wages are normally the single most
important cause of increasing in costs
- Government can raise indirect tax rates or
reduce subsidies thus increasing prices
- Imports can rise in price
- Occurs because
of rising costs
- Demand-Pull Inflation
- Measuring Inflation
- A Price Index only measures
inflation for average households. It
also cannot take into account
changes in the quality and
distribution of goods over time
- In the UK there are 2
measures of the Price Level
- Retail Price Index (RPI)
- Consumer Price Index (CPI)
- Retail Price Index (RPI)
- A Price Index only measures
inflation for average households. It
also cannot take into account
changes in the quality and
distribution of goods over time
- Inflation is defined as a
sustained general rise in
prices
- Hyper-Inflation describes a situation
where inflation levels are very high
- Creeping inflation would describe a situation
where prices rose a few % on average each year
- Hyper-Inflation describes a situation
where inflation levels are very high
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