Inflation

eabod
Mind Map by eabod, updated more than 1 year ago
eabod
Created by eabod almost 7 years ago
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A-Levels Economics Mind Map on Inflation, created by eabod on 05/06/2013.
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Inflation
1 The Cost of Inflation
1.1 Shoe-Leather Costs
1.1.1 'Shopping around'
1.2 Menu Costs
1.2.1 If there is inflation, restaurants have to change their menus to show increased prices. Similarly, to shops, ect
1.3 Psychological and Political Costs
1.3.1 People feel they are worse off, even if their incomes rise by more than the rate of inflation
1.4 Unemployment and Growth
1.4.1 Inflation increases costs of production and creates uncertainty
1.4.1.1 This lowers the profitability of investment and makes businessmen less willing to take the risks associated with any investment project
1.5 Re-distributional Costs
1.5.1 Inflation can redistribute income and wealth between households, firms and the state
2 The Causes of Inflation
2.1 Demand-Pull Inflation
2.1.1 If AD rises and there is no increase in AS. This could be caused by
2.1.1.1 Consumer spending may rise excessively
2.1.1.2 Firms may substantially increase their investment spending
2.1.1.3 World demand for UK exports may be rising because of a boom in the economy
2.1.1.4 The government may be increasing its spending, or cutting taxes
2.2 Cost-Push Inflation
2.2.1 Occurs because of rising costs
2.2.1.1 Imports can rise in price
2.2.1.2 Profits can be increased by firms when they raise price to improve profit margins
2.2.1.3 Wages/Salaries account for 70% of national income and hence increases in wages are normally the single most important cause of increasing in costs
2.2.1.4 Government can raise indirect tax rates or reduce subsidies thus increasing prices
3 Measuring Inflation
3.1 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
3.2 In the UK there are 2 measures of the Price Level
3.2.1 Retail Price Index (RPI)
3.2.2 Consumer Price Index (CPI)
4 Inflation is defined as a sustained general rise in prices
4.1 Hyper-Inflation describes a situation where inflation levels are very high
4.2 Creeping inflation would describe a situation where prices rose a few % on average each year
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