Inflation+and+Deflation

[[image:Inflation_pic.png]]
Key Terms:

Inflation Falling Inflation Deflation

=Measuring inflation: =

Retail price index (RPI)/ Consumer Price Index (CPI):
====The most commonly used price index is the Consumer Price Index (CPI) which is also known as the Retail Price Index (RP I). This index is basically arrived at by following an 'identical basket of goods' in a country over time in order to show the change in the overall price level. In the Uk for example it is calculated each month by taking a sample of goods and services (approx 600), which the typical household might buy. Included are such items as food, heating, housing, household goods, bus fares and petrol. Alternatively it can be measured just once a year. ====

The data below follows such a basket in Ireland over a year.
pints of Guinness: +20%

Lamb: 10%

crab pate: -10%

potatoes: 30%

====Now we could just average these out and find that inflation is 12.5%. However that would only be accurate if we spent the same amount on each good. ====

====Note that often these indexes are referred to as weighted indexes- which means that different goods and services will have differing effects on inflation. In general the more of our income we spend on a good, the more it will affect the CPI. ( in other words a 5% increase in the cost of housing will change the CPI more than a 5% change in the cost of matches) ==== ====For example let’s say that 30% of income went on potatoes, 40% on Guiness, 20% on Lamb and 10% on Crab pate. How would this affect the CPI? Do the calculations below. ====

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">hint : price change x weighting for each and then divide by the total weighting and you'll have inflation rate
====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Also note that index numbers are often shown relative to a starting value of 100 (the base value or base year) so if the first year prices were 100 then in yr 2 we had a value of 130, this would mean that inflation was 30%. For a fuller explanation look at your textbook p 301 onwards. ====

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Now attempt exercise 2 p303 and fill in the following table

 * ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Good/service ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Weighting ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Price ==== ||  || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Weighting ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Price ==== ||   ||
 * || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Yr3 ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Yr3 ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Weighted av price ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Yr4 ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Yr4 ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Weighted av price ==== ||
 * ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Travel ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">.25 ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">30 ==== || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">7.5 ==== ||  ||   ||   ||
 * ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">House goods ==== ||  ||   ||   ||   ||   ||   ||
 * ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Clothing ==== ||  ||   ||   ||   ||   ||   ||
 * ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Transport ==== ||  ||   ||   ||   ||   ||   ||
 * ||  || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Total ==== ||   ||   || ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Total ==== ||   ||

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Another activity
<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">Causes of inflation and Consequences of inflation
====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">This website has a great site for students to independently research the effects of inflation and deflation on a country ==== ====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">(just click on [|inflation island] ) ====

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">The following websites can help you learn more about inflation, price indices and deflation:
====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[|www.bized.co.uk/virtual/economy/policy/outcomes/inflation/inflth.htm] ====

<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[]
====<span style="font-family: 'Trebuchet MS',Helvetica,sans-serif; font-size: 16px;">[|www.economicshelp.org/blog/inflation/difference-between-rpi-rpix-and-cpi/] ====