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level: Measuring Inflation

Questions and Answers List

level questions: Measuring Inflation

QuestionAnswer
What are the 2 Ways of Defining Inflation1. Inflation is the Sustained Rise in the Price of Goods and Services over some Time. 2. Inflation is the Fall in the Value of the Money. [£10 can buy Less - its Purchasing Power has Fallen]
What is 1. Deflation 2. Hyperinflation 3. Disinflation1. Deflation is when the Average Prices of Goods are Falling 2. When Prices shoot up Rapidly, and the Currency loses its Value [PP Plummets] 3. When the rate of Inflation is slowing down. Prices are still Rising, but just at a Slower Rate.
What is the Retail Price Index? [RDI] -How is it Calculated - what does it show? -How are the items even defined?-The RDI is just a Measurement for Inflation. That's it -2 Surveys is needed. 1st is a Survey of 6K Homes [Living Costs & Food Survey] which finds out what people Spend their Money on, and what Proportion. This helps with the Weighting of each item [20% on Apples = 20% Weight] -Second Survey is on Prices, and just measures the Change of 700 most Commonly used Commodities [Basket of Goods] [These Items comes from the First Survey] -Price Changes are then Multiplied by the Weightings, and then Converted to an Index Number. Inflation is just the Percentage Change to the Index Number
What is the Consumer Price Index? [CPI] -How is it Calculated - any differences to the RPI? -What does it show?-Similar to the RDI [Measurement of Inflation] but 3 Differences 1. Some Items are Banished from the CPI, main ones being Mortgage Interest Payments & Council Tax 2. Different formula to calculate the CPI 3. Bigger sample is needed for the CPI -This makes the CPI a little lower than the RPI, unless Interest Rates are Low. But they have the same long term trend -The UK uses the CPI officially, and Internationally to an Extent
What are the Limits of the RPI and the CPI-RPI will Exclude Households in the top 4% of Income, and CPI will be more Broader but doesn't factor Mortgage Payments -Information from the Living Costs & Food Survey can be Wrong -Basket only changes once a Year so Short Term Changes is Missed
Why is the RPI and the CPI helpful for Wages and State Benefits?-Employers and TU will have them as a Starting Point in Talks -Government will use them to Increase State Pensions and Welfare Benefits -Benefits are Index- Linked - Rise automatically each year by the Same Percentage as the Chosen Index
Why is the RPI and CPI helpful for UK's International Competitiveness-If the CPI Rate is Higher in Britain than other nations, then the UK Goods will be less Price Competitive, as it'll be more Expensive for other Nations to purchase [Prices are rising] -Exports will Fall, and Imports, because of Domestic Inflation, will be made Cheaper