Business Studies - External Influences - Inflation And Unemp

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Business Notes Emma Rudd BMA
External Influences
Inflation and Unemployment
What is Inflation?
Inflation is a persistent rise in the general price level and an associated fall in the
value of money. For many businesses a low rate of inflation is not a problem. So long
as wages are rising at about the same rate, or higher, a low constant rate of price
increases simply serves to help maintain demand. Inflation only becomes a major
problem for businesses when it is high, rising rapidly or (worst of all) is doing both
How is Inflation Measured?
The UK government measures the rate of inflation by the use of the Retail Price
Index (RPI). The Retail Price Index measures the average monthly charge in the
prices of goods and services purchased by households in the UK the index us
calculated using more than 600 separate goods and services for which price changes
are measured throughout the country. Each month 12000price calculations are
included in the index.
The Causes of Inflation
There are two causes of inflation they are demandpull and costpush.
Demand Pull Inflation
DemandPull inflation occurs when the demand for a countries good and service
exceeds its ability to supply the products, thus, prices rise generally as a means of
restricting demand to the available supply.
Demandpull inflation usually occurs at the bottom stage of the business / trade
cycle when the economy is at full stretch with most of its resources in use. At this
high level of production, shortages and bottlenecks occur in supply. Because
resources and labour become relatively scarce, firms offer higher prices and wages,
and inflation is a result. Governments raise interest rates to prevent the economy
overheating and prices rising when demandpull inflation occurs.
CostPush Inflation
Costpush Inflation occurs when costs rise due to forecasts such as rising wages or
costs of raw materials and components. This type of inflation has several causes.
Wage Rises
If trade unions and employees are successful in negotiating pay increases above the
rate of inflation, further price rises might result. This becomes more likely if
productivity is not increasing, allowing businesses to offset some of the increased
wage costs against additional production. Some business analysts became concerned
in 1999 that pay rises were potentially inflationary.
Imported Inflation
One of the hidden causes of inflation rising is imported prices. The UK is susceptible
to this type of inflation, as it is an `open' economy importing large quantities of raw
materials, components and finished goods. Import process rise when the exchange
rate is falling and more pounds are required to purchase a given amount of foreign

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Business Notes Emma Rudd BMA
Expectations and Inflation
Expectations are an important part of the process of creating inflation. If managers
and businesses anticipate rising inflation, they might take actions, which can fuel the
inflationary process. If firms expect their suppliers to increase the prices of raw
materials and components, they might raise their selling prices in anticipation. The
action also provides a windfall profit in that, for a while, firms sell at higher prices
whilst their cost have not risen.…read more

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Business Notes Emma Rudd BMA
Reduced Expectations
The government has reduced the expectation of inflation. This has help businesses
to be confident in setting prices and has dissuaded unions from putting in excessive
(and inflationary) pay claims. The low rate of inflation in the UK has also been one of
a number of factors persuading foreign firms to move to Britain.
Inflation can offer some benefits to businesses, however some analysts suggest
that low and stable inflation rates may be more beneficial.…read more

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Business Notes Emma Rudd BMA
Frictional Unemployment
People moving between jobs cause frictional unemployment. If a person leave one
job they may be unable to move into a new position immediately. Whilst they are
searching for new employment, they are classified as frictionally unemployed. The
government is providing improved information on job vacancies and this may reduce
the level of frictional unemployment. A healthy economy will have some amount of
frictional unemployment as people change jobs.…read more


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