economics theme 2 pack 7

Define the term CPI

Define the term CPI

consumer price index

Explain how CPI is calculated

1. base year is selected and a family expenditure survey is carried out to 7000 households

2. a representative basket of goods is created

3. each good has a weighting ( reflects proportion of household income)

4. inflation is calculated by weighting x price index

what are the limitations of CPI

not representative of all households

slow to respond to new products and services

what is demand pull inflation

when an increase in demand causes inflation

what is cost push inflation

when an increase in costs of production causes inflation

what causes cost push inflation

rise in raw material prices

rise in national minimum wage, corporation,indirect tax

what causes demand pull inflation

low tax rates

low interest rates

high gov spending

high quantitative easing

how can a weaker pound cause both demand pull and cost push inflation

weaker pound - imports dearer, exports cheaper

demand pull- high net trade

cost push- increase in price for imported raw materials

impact on firms

high business uncertainty

falling international competitiveness

increase in menu costs

impact on consumers

fall in real incomes leads to low standard of living

fall in purchasing power of incomes

impact on government

if inflation is uncertain, difficult to ensure public sector wages and pension increases are in line with inflation

impact on workers

wage price spiral- difficult to gain wage increase to maintain real income

what is RPI

relative price index

1. collects data once a month about changes in price of 700 goods

2. price change x weighting=price index

3. includes mortgage interest payments and council tax