Macroeconomic Indicators

Inflation and Deflation

Key terms• Inflation• Deflation• CPI• Family Expenditure Survey• Cost-push inflation• Demand-pull inflation• Wage-price spiral• Anticipated inflation• Unanticipated inflation• Shoe-leather costs• Benign deflation• Malevolent deflation

• Retail Price Index (RPI)• Consumer Price Index (CPI)

– Weighted price index• Relative importance as proportion of

spending• Price index X weighting = weighted price

index

Limitations of CPI• Different population groups

experience different inflation. Not everyone is ‘average’.

• House prices not included but mortgage repayments influence spending.

• Over-estimate inflation. Prices may not reflect quality/innovations

Cost Push revisited• Causes

– Import costs– Labour costs– Indirect tax rises– Wage-price spirals

Demand Pull revisited

Quantity Theory of Money(Monetarists)

• That an increase in the money supply will lead to an increase in the price level– Fisher equation– Equation of exchange

• M x V = P x T (or MV = PY)• M = Money supply• V = the velocity of circulation• P = general price level• T = Transactions (output)• Y = RNO (real GDP)

• Velocity of circulation– The number of times a unit of currency

changes hands in a year (to buy goods and services)

– This is assumed to be constant– T and Y tend to increase slowly over

time, therefore are also assumed to be constant

– M x V = P x T if V and T (Y) are constant, a change in M will cause a change in P – inflation!

Consequences of Inflation• Competitiveness• Investment• Distribution of income• Industrial relations• Fiscal drag• Hyperinflation• Money illusion• Menu costs• Shoe-leather costs

Inflation and Index numbers

Note the micro

overlap

Add the definitions for extra marks

Include a diagram for extra marks