Inflation and deflation

CONTENTS Part 1

1. Inflation
2. Measuring Inflation
3. The CPI versus the RPI
4. Demand-pull inflation
5. Aggregate demand and inflation
6. Causes of demand-pull inflation
7. Cost push inflation
8. Causes of cost push inflation
9. The consequences of inflation
10. Benefits of inflation
11. Effects of inflation

Part 2

1. Deflation
2. Good deflation
3. Bad deflation
 Inflation

Inflation is the name given to an increase in price levels generally. It is also manifest in
the decline in the purchasing power of money

Inflation does not mean that the price of every good and service increases, but that
on average the prices are rising.

Inflation reduces the value of money

Governments aim to control inflation because it reduces the value of money and
the spending power of households, governments and firms.

Creeping inflation

A low and stable rate, of for instance 2%, is generally regarded not to be a problem.
Indeed, seeing a low and steady rise in prices may encourage firms to produce
more. Such a rate of inflation is sometimes known as creeping inflation.

Hyperinflation.

Hyperinflation is a term to describe rapid, excessive, and out-of-control general

price increases in an economy. This is often taken to be an inflation rate that
exceeds 50%

Nominal prices

Nominal prices are simply money prices, which can change over time due to
inflation

Real prices

In contrast, real prices have been adjusted for inflation.

too Lazy to Study .com

 Measuring Inflation
Measurement of inflation

Inflation erodes the real value of money. In order to measure changes in the real value of
money as a single figure, we need to group all goods and services into a single price index.

Consumer price index

A consumer price index is based on a chosen 'basket' of items which consumers purchase. A
weighting is decided for each item according to the average spending on the item by consumers

Stages in constructing consumer price indices.

Selecting a base year:

This is usually a relatively standard year in which nothing unusual has occurred. It is given a
value of 100. The base year is changed on a regular basis.

Carrying out a survey to find people’s spending patterns:

A sample of the population’s households are asked to keep a record of what they buy. The
products purchased are placed into categories such as food and clothing and footwear.

Attaching weights to the different categories:

Weights are based on the proportion of total expenditure spent on the different categories. For
instance, if on average households spend $500 of their total expenditure of $2,000 on food, the
category will be given a weight of ¼ or 25%.

Finding out price changes:

Prices in a range of retail outlets and from a number of other sources such as gas companies
and train companies are recorded.

Multiplying weights by price changes:

OF
ND
E VIE EW
The total will give the change in the consumer price index but it can go much higher.

PR E
too Lazy to Study .com
 too Lazy to Study .com
ECONOMICS RESOURCES
SUBSCRIPTION BENEFITS
Amazing economics notes
1 TooLazyToStudy's economics notes include over 200 frequently
examined topics and are set in an engaging template. The best
part? These notes are editable so you can rewrite it in your own
words in Powerpoint.

A* economics essays
2 Wonder what goes into a top-grade economics essay? We've
constructed a collection of over 60 economics essays written by A*
students...and yes, diagrams are included. We've put a lot of effort
to structure and optimise each and every essay.
 too Lazy to Study .com

HOW DOES IT WORK?

1 Select the Economics

Resouces subscription
Sign up, choose your start date and purchase
the subscription securely via PayPal.

t o claim a
here
Click d is coun
t
50%

Access the notes and essays

2 Navigate normally through the website and click access👑 to
view the pages you've just subscribed!
 too Lazy to Study .com

FREQUENTLY ASKED
QUESTIONS

1 Who is the economics resources plan for?

The economics notes and essays are IDEAL for A level, AS level
and O level students

How long does a subscription last?

2 You will get full access to the economic resources for one year. You
can choose the start date.

Who writes the essays?

3 We are a team of talented students who have dedicated a lot of time
and effort to write THE perfect economics essay. Each essay has
been vetted, moderated and approved. We hate to brag but every
member of our team has scored an A or an A* for their A levels!

Can I get a refund?

4 Sadly, we have a no-refund policy. Don't hesitate to contact our
friendly customer support team for any queries regarding refunds.
We commit to being completely fair and reasonable!
 too Lazy to Study .com

FREQUENTLY ASKED
QUESTIONS

5 Why choose us?

Sure, there may be other websites out there posting economics notes and
essays. What makes us different?

1. We've put ourselves in the mind of a student when making the

economics notes.

We know that reading large paragraphs of economic theory can be

well... boring. That's why we've made our note templates as clear and
concise as possible. Every student is unique,and so should be their
notes! That's why we've made it possible to edit them.

At the end of each section, you can even create your own mindmaps!

2. We know writing economics essays can be a struggle, especially during

an exam, during which time is limited.

That's why we've structured

every essay in an optimal way
and broke every essay down
into headings and paragraphs.
We've even included tips and
marking scheme comments!