Inflation - Chapter 12

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  • Created by: sammilaw
  • Created on: 15-01-16 15:10
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  • Inflation
    • Chapter 12
    • Measuring inflation:
      • CPI (Consumer Price Index)
        • A weighted price index to measure prices of a typical 'basket of goods'
        • The main official measure of inflation
        • Criticisms:
          • Does not include costs of housing
          • An average measurement = less accurate
          • Price increases could mask improvements in quality
    • Cost-push inflation:
      • A rise in costs of imported raw materials
        • i.e. inflation in other countries or a fall in the pound
      • Rising labour costs
      • Higher indirect taxes (tax on expenditure)
      • Wage price spirals
        • i.e. workers will be unwilling to accept pay rises less than the expected inflation rate
    • Consequences of inflation:
      • Reduced international competitiveness
      • Lack of investment
      • Unanticipated inflation
      • Menu costs - businesses having to frequently change their prices
      • Shoe-leather costs - the time consumers spend 'shopping around'
      • Effect of distribution of income
        • i.e. those with a fixed income lose out
      • Fiscal drag
        • increases in the burden of taxation when tax allowances are not increased in line with inflation
      • Hyperinflation

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