inflation

Question 1

What is inflation?

Answer 1

sustained rise in the average price of goods and services over time.

Question 2

What is deflation?

Answer 2

when the rate of inflation is negative (below 0%).

Question 3

What is disinflation.

Answer 3

when there is a fall in the rate of inflation (average prices are rising, but at a decreasing rate).

Question 4

What the average price level?

Question 5

How do you measure inflation?

Question 6

How do you calculate the CPI?

Question 7

What is the CPI?

Question 8

What are the benefits of the CPI?

Question 9

What are the limitations of the CPI?

Answer 9

• doesn’t take into account housing costs (such as tax, mortgages, rise in interest rates etc.) the CPIH would be a better measure for this problem
• doesn’t take into account the quality of goods (which may be the reason that there is an increase in the price)
• there is a time lag so new products that emerge may not be added and it isn’t sensitive to short term inflation which may cause people to change products in the baskets to cheaper substitute goods
• it is not representative of all consumers ( single people will have different spending to those with a family + 10% of costs in the index is motor costs which doesn’t reflect those who don’t own vehicles )
• there may be errors in data such as sampling errors from surveys
• does not include any costs from the digital economy as many services do not have a price

Question 10

Challenges in measuring inflation:

Answer 10

-basket of goods may not accurately represent the changes of consumer preferences over time, therefore not accurately representing what consumers are buying
- substitution bias (people are more likely to buy cheaper goods when prices of items go up- they alter their spending patterns + are sensitive ti changes in price)
-quality adjustment (adjustments must be made to the CPI to account for quality changes, which is difficult to do as it is subjective and hard to quantify accurately)
-geographic variation (CPI is a national measure and may not capture regional variations in price effectively)
-subgroups and demographics (represents an ‘average’ consumer and inflation experience can vary based on situation ex. age, income, urban vs rural populations etc.)