Inflation
- Created by: Luke Hashman - Team GR
- Created on: 29-04-14 09:30
View mindmap
- Inflation
- Measures
- CPI
- Family Expenditure Survey
- Limitations
- Not representative of everyone - an average
- Doesn't include house prices
- Price rises can hide quality improvements
- RPI
- CPI
- Causes
- Domestic
- Supermarket prices
- VAT increases
- External
- Higher crude oil prices
- Increase in prices of commodities
- Currency fluctuations
- Domestic
- Types
- Cost-push
- Rise in cost of imported raw materials
- Rising labour costs
- Higher indirect taxes
- Wage-price spirals
- Demand-pull
- Little spare capacity in economy
- Increase in AD = increase in prices
- Little spare capacity in economy
- Cost-push
- Consequences
- Hyperinflation
- Destroys currency
- Return to barter
- International competitiveness
- If UK inflation higher than competitors', exports less competitive
- AD growth slows --> output gap
- 30% of UK GDP = exports
- If UK inflation higher than competitors', exports less competitive
- Effect on investment
- More uncertainty = less investment
- Leads to uncertainty
- More common when inflation is high, e.g. UK 1970/80s
- Leads to uncertainty
- More uncertainty = less investment
- Unanticipated inflation
- Leads to uncertainty
- More common when inflation is high, e.g. UK 1970/80s
- Leads to uncertainty
- Menu costs
- Mainly administrative
- Frequent price changes
- Reprogramming
- Mainly administrative
- Shoe-leather costs
- Time spent shopping around
- Effect on distribution of income
- Fixed-rate borrowers 'win'
- Savers 'lose'
- Worsening industrial relations
- Workers push for higher pay
- Strikes
- Fiscal drag
- Inflation pushes workers into next tax threshold
- Hyperinflation
- Positives
- Pay packets and revenues rise
- Money illusion though?
- Pay packets and revenues rise
- Quantity theory of money
- Fisher equation = equation of exchange
- M x V = P x T (or MV = PY)
- M = money supply
- V = velocity of circulation
- P = general price level
- T = transactions = output
- Y = RNO = GDP
- M x V = P x T (or MV = PY)
- Fisher equation = equation of exchange
- Measures
Comments
No comments have yet been made