P R E S E N T E D BY E L I Z A B E T S T E FA N OVA

INFLATION

• what is inflation, what causes inflation, how is inflation measured, what are the effects of inflation, and is inflation harmful;

• the inflation basket of goods 2012;

• questions.

WHAT IS INFLATION?

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

WHAT CAUSES INFLATION?

There are many causes for inflation, depending on a number of factors: • an increase in expenditure that exceeds

production capacity;• an increase in wage costs;• an increase in the price of raw materials and

semi-furnished products;• government measures relating to VAT, excise and

prices of government services;• an increase in profit and capital costs.

DEMAND-PULL INFLATION

This type of inflation is a result of strong consumer demand. When many individuals are trying to purchase the same good, the price will inevitably increase.

COST-PULL INFLATION

Cost-push inflation develops because the higher costs of production factors decrease in aggregate supply in the economy. Because there are fewer goods being produced and demand for these goods remains consistent, the prices of finished goods increase (inflation).

HOW INFLATION CAN BE MEASURED?

There are several ways to measure inflation. However, the most popular way to measure inflation is through the consumer price index (CPI).

Inflation rate = (CPIYear 2 - CPIYear1) x 100% CPIYear1

WHAT ARE THE EFFECTS OF INFLATION?

Inflation's effects on an economy are various and can be simultaneously positive and negative.

- Negative effects of inflation ● an increase in the opportunity cost of holding money● discourage investments and savings

- Positive effects of inflation● encourage investments in non-monetary capital projects

● ensuring that central banks can adjust real interest rates

IS INFLATION HARMFUL?

Inflation is very harmful to any economy because it can ruin the economy's development and growth and this is not supposed to be. Inflation is also very harmful to any economy because the people living in that economy might not survive the situation and this is when you see that an economy is affected and if nothing is done to it, it can cause an economy to collapse.

WHAT IS BASKET OF GOODS?

This is a relatively fixed set of consumer products and services valued and used on an annual basis to track inflation in a specific market or country. The goods in the basket are often adjusted periodically to account for changes in consumer habits. The basket of goods is used primarily to calculate the Consumer Price Index (CPI). Moreover, a basket of goods can give you a real sense of how society is changing.

THE INFLATION BASKET OF GOODS 2012

Inflation basket of goodsPhotograph: Guardian

www.guardian.co.uk

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