To What Extent is Inflation a serious Economic Problem
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Before considering whether Inflation has serious Economic Problems, we
have to get to grasp what it exactly is. Inflation is defined as a
sustained general rise in prices in the Economy. Obviously the
government can't measure every single price change for every single
good in the economy, so therefore they take a basket of goods and by
using a price index measure a change in it. The basket of good has a
representative range of goods and services and it needs to be recorded
at a regular basis, to measure how inflation is changing. The UK
government currently use the RPI (Retail Price Index) as a measure,
which measures, in theory, each month, 150 000 prices for 600 items.
Surveyors are sent out to a random set of households and measure it on
the same day of each month to record a fair reading. The goods and
services in the basket of goods are also weighted, which means the
goods and services which use the most household spending are more
important than the goods and services which use the least and
therefore the larger proportion of total household spending has the
largest weight. This all makes the measure of Inflation more accurate.
However, although inflation is a useful measure for the government, as
they can see how the general price level affects other economic
factors, it still is considered to be a problem. The higher the rate
of inflation the greater the economic cost is what economists see and
the reasons for this follow.
Stable prices give the consumer a general idea of what a fair price is
for a product and which suppliers charge the least for them. With
inflation being high, both...
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...vernment are uncertain what
the rate of inflation will be in the future. When planning they
therefore has to estimate as best they can the expected rate of
inflation. To mitigate the effects of inflation the government uses a
process called INDEXATION, which allows inflation to be anticipated.
This gets rid of some of the costs of inflation however causes some.
The indexation builds in cost structures, such as wage increases,
which reflect past changes in price.
I have looked at a range of aspects involved with inflation and what
the costs to the economy are when the scenarios are different,
hyperinflation, sustained low inflation etc. and I conclude that
inflation will always have some costs if it is both high and low, but
higher inflation, which could lead to hyperinflation has more costs to
the economy and therefore causes a greater economic problem.
...formula is based on an arithmetic mean of the price levels in the two selected cities. In order to calculate the index for the two cities examined, the average price of each item must first be calculated. The prices are then compared in each town to the average prices. There is still another element to the calculation of the CPI that we haven’t discussed just yet, and that is not every product in the survey is as important as the other. For example, the cost of a vehicle is more important in determining the index than the price of a loaf of bread. The weights have been chosen on the basis of research that indicates while there are certainly differences amongst the various national spending patterns; there are some average figures that most companies accept. The chart below indicates the sum of individual weights allocated to each item composing the index categories.
A monthly release from the Bureau of Labor Statistics (BLS), the PPI shows trends within wholesale markets, manufacturing industries, and commodity markets. All industries that produce physical goods that make up the economy of the United States. They are included, but not imports. Taking into consideration, the PPI measures the purchases of goods and services completed by urban households, the average changes over time in the sale prices received by domestic producers, and the sales at all production levels for producers in the United States. This includes sales of unfinished products used throughout the production and production chain. The PPI can serve as a principal indicator of definitive price changes at the consumer level, and of inflation if the trend in the PPI is higher. Low inflation is good for stimulating consumer spending, corporate profits and, ultimately, the stock market. The rise in inflation can be a sign of an overheated economy and potentially higher interest rates. On the other hand, the PPI can give analysts, business executives, and investors with information on price trends at various stages of the production process. This is useful for companies in making capital investment decisions, for analysts in tracking economic trends and for investors looking for clues about future inflation. Also, the PPI can offer analysts, business executives, and
change in prices over the last year in each region can be seen in the
This essay will assess research into the impact of globalization on inflation and discuss whether it has weekend the ability of central banks to control the dynamics of inflation. The ability of central banks to control the rates of inflation may be substantially complicated by the increased globalization of the goods markets, factor markets and the financial markets (Woodford, 2007). The ability of national banks to influence the dynamics of inflation through monetary policy may be undermined by globalization. The central bank’s primary goal is to maintain price stability by regulating the level of inflation through monetary policy. Globalization increases trade both within and across countries (Schwerhoff & Sy, 2013). Through communicating their policy intentions regarding the future short-term interest rates, central banks can affect also the current longer-term rates (Tang, 2011). The new consensus (DSGE) Model incorporates four components, the output gap equation, the Phillip’s curve, the exchange rate equation and the Policy Rule (Woodford, 2007). The policy rule incorporates the Taylor rule which stipulates the amount a central bank should change the nominal interest rates in response to changes in inflation, output or other economic conditions. It also incorporates the idea of the inconsistent trinity, (sovereign monetary policy, fixed exchange rate and free capital flow) where only two of these can be possible at any given time.
Inflation; ‘a situation in which prices rise in order to keep up with increased production costs… result[ing] [in] the purchasing power of money fall[ing]’ (Collin:101) is quickly becoming a problem for the government of the United Kingdom in these post-recession years. The economic recovery, essential to the wellbeing of the British economy, may be in jeopardy as inflation continues to rise, reducing the purchasing power of the public. This, in turn, reduces demand for goods and services, and could potentially plummet the UK back into recession. This essay discusses the causes of inflation, policy options available to the UK government and the Bank of England (the central bank of the UK responsible for monetary policy), and the effects they may potentially have on the UK recovery.
This article by Andrew McCathie posted in EarthTimes and titled “European inflation climbs unemployment at 12-year high was posted on Friday July 30 2010. The article reports that food and energy costs have played a critical role in driving up inflation in the 16-member eurozone. The rates of unemployment remained stagnant to its highest level during this time.
price of that good and service, and an increase in supply of a good or
As in other centrally planned economies, most consumer prices in Romania were fixed before the 1989 revolution. However, with the liberalization of economic policy dramatic changes occurred and high inflation was, and still is, expected to remain one of Romania¡¦s key short-term economic concerns.
As an example, if a 2% increase in price resulted in a 1% decrease in
Indian economy is passing through a critical phase with growth rates dropping to a sub 5% range. The predictions for future growth also don’t seem to be bright. The fiscal deficit is looming large ranging at a high 4-5 % of GDP threatening the economy. The retail inflation too is hovering in double digits for the last 24 months. So all in all, a low growth rate, a high fiscal deficit, a high inflation, a high CAD prompted the S&P to warn India of downgrading its investment status to JUNK. Now, inflation targeting seems to be the most suitable solution that will dole out India’s economy. The recent RBI expert committee report too suggested that India should adopt inflation targeting as its sole policy. With the committee’s recommendations almost getting accepted unofficially, India is on the verge of jumping into the bandwagon of the much touted Inflation Targeting Framework countries. This situation calls for a heated debate on the pros and cons of issue.
Inflation Expectation is a concept that talks about the notions that workers, businesses and investors have about the prevalent inflation rates in the market and how their decision-making will be affected in the future due to their perceived rates of inflation.
The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The CPIs are based on prices of food, clothing, shelter, fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Consumer price indices (CPIs) are index numbers that measure changes in the prices of goods and services purchased or otherwise acquired by households, which households use directly, or indirectly, to satisfy their own needs and wants. A price index can be termed as a measure of the proportionate, or percentage, changes in a set of prices over time. The CPI reflects spending patterns. A consumer price index (CPI) measures changes in the prices of goods and services that households consume. It is said that one of the main reasons for compiling a CPI was to compensate wage-earners for inflation by the proportionate adjustment in their wage
One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.
However, more goes into controlling inflation than just the interest rate. A big factor in Brazil’s inflation rate is their infrastructure. When domestic production grows, Brazil faces transportation issues which causes the offer to stagnate. Once it stagnates the demand grows and puts an upward pressure on prices and therefore increasing inflation. In order for Brazil to control their inflation there needs to be a significant and constant development in infrastructure. Infrastructure plays big role because Brazil is one of the largest countries in the world in terms of area and population. A higher population leads to higher demand for certain goods and puts a lot of pressure on the inflation rates and contributes to why inflation historically
The world economy is a dynamic, multifarious and complex entity. The contemporary economy can be distinguished from past economies simply because technology permits a greater degree of interdependence than has previously been possible. An integral facet of the 21st century economy is what Harvey (1989) identifies as ‘Time-Space Compression’, the phenomenon described by Larsson (2003, pg.89) as “The process of world shrinkage”. This “shrinkage” allows faster capital exchanges and a rapid movement of commodities. Such close spatial relations create a degree of economic dependence, as global interrelations have the potential to become far more entrenched than before. Although Graham (1998) regards space as having been ‘conquered’ by technology, this argument can be contested, as significant spatial inequality remains across local, national and international scales. Brandt (1980) accurately maps the ‘North-South Divide’ (Fig.1), observing large economic disparities between what he deems the ‘Global North’ and the ‘Global South’. Another unequal facet of the economic system is its governance, with many developed nations adopting neoliberal policies, whilst certain underdeveloped nations have less developed social rights and economic infrastructures. Hudelson (1999) argues that a movement away from classical liberalism and economic liberalism in conjunction with the adoption of neoliberal policy characterises the contemporary world economy. Viewing the global economy through Hudelson’s lens, one can observe the extent to which it is characterised by the policies that govern it. This essay will critically examine the extent to which economic inequality, interdependence and excessive deregulation are the main challenges facing the contemp...