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Inflation and Structural Change
Inflation is a sustained increase in the average price level of a country. It
can also be seen as a fall in the value of money. This is known as Deflation.
CPI Consumer Price Index
This is one of the two measurements the government uses to assess the levels of inflation. This
measurement takes into account the nation's "basket of goods". In this are the items that have been
deemed "essential" to the modern family. This allows an average trend to be created, from which
the inflation rate can be set.
RPI Retail Price Index
This measurement takes into account mortgage interest payments, meaning general interest rates
affect RPI. In other words, RPI is CPI with interest rates added into it. If interest rates fall, so will the
RPI, whereas CPI will stay the same.
Currently inflation is at 3.6% (February 2012). This is above the government's target of 2 %. Today's
inflation rate has been mainly driven by rising fuel prices and food prices. Recently the government
has placed VAT onto the sale of hot foods i.e. pasties. This has been the factor in the increase of food
prices. Political turmoil in the Middle East regarding oil supplies has continued, increase the price of
Why is Inflation a Problem?
Real Value = Nominal Value Inflation
If someone was earning £20,000 but the next year it was increase to £20,500, in nominal terms this
will have risen by £500. However, the income needs to rise at the rate of inflation so the person can
still buy the same goods and services as before. If the inflation rate was 5%, the person would need
£1000 increase, not £500. In real terms, this person is less off with the increase.
1. Money loses its value, people lose confidence in the money as the real value of their savings
2. The nominal rate of interest may be lower than the rate of inflation
3. People on fixed incomes can afford less as the years go on, if inflation occurs
4. Borrowers gain as they have to pay less back nominally
5. Harder to make accurate cash flow forecasts
6. If inflation rises quicker than that of other countries, the UK becomes less competitive
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Structural Change occurs when economies change from one focus i.e.
secondary-focused, to another i.e. tertiary-focused.
Structural change occurs in all economies at some stage. The last one to occur in the UK's economy
was around 30 years ago, where the economy shifted its priorities from the secondary sector to the
tertiary sector. It is only a problem when the labour is not mobile in terms of inability to move around
the country and unable to learn new skills.…read more