inflation

Views:
 
Category: Entertainment
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

PowerPoint Presentation:

Research time! In groups of 4s – assign a leader Do some research on Inflation in the UK Areas of research (you could divide this within your team) Definition of inflation How is it measured? What causes inflation? What % inflation rate does the UK aim for? Who has responsibility for controlling inflation in the UK? How do they do it? How has inflation in the UK changed over the last 10 years? What is the inflation rate now? What is hyperinflation and deflation? Which countries have suffered from this? What are the costs of inflation? Make notes for your folders Prepare a PowerPoint presentation to be given to the class

PowerPoint Presentation:

Inflation Watch Inflation Videos (4) http://www.youtube.com/watch?v=-d0-8tr6DGo&list=PLslyOrpjJ0z2H8B-ZjGgFjNCZHcHqASmr http:// www.youtube.com/watch?v=7I48BA9-iu4&list=PLslyOrpjJ0z2H8B-ZjGgFjNCZHcHqASmr http :// www.youtube.com/watch?v=aSWgRuJJ9-c http://www.youtube.com/watch?v=- pwincsv4E0

PowerPoint Presentation:

Second Macroeconomic objective – Stable prices This is all about inflation By the end of this section you will understand How a rise in the cost of living affects the value of money How changes in the value of money are measured What is the Retail Price Index (RPI) and the Consumer Price Index (CPI) The meaning of inflation Why it is important to keep inflation stable What causes inflation What policies can government use to keep inflation stable

PowerPoint Presentation:

The value of money The value of money is the goods and services we can buy with money If the amount of goods and services you can buy with a sum of money changes then there has been a change in the value of money If prices are rising we say there has been a rise in the cost of living it costs us more to live because we can get less for our money we can buy less for £1 this year than we did in the previous year If prices are falling we say that there has been a fall in the cost of living Getting more goods and services for our money – for our £1 we are buying more than the previous year It is costing us less to live The amount we can buy for a certain sum of money is called the purchasing power of money In 1970 I could have bought 11 loaves of bread for £1, by 2000 I could have bought around 2 and this year I would be lucky to get 1 http://www.bankofengland.co.uk/education/inflation/prices/prices.htm

PowerPoint Presentation:

Measuring changes in the value of money It does not mean that we are worse off if the cost of living goes up (if prices go up) Our standard of living depends on both prices and our wages If prices go up and our wages stay the same our standard of living has gone down If prices go up and our wages go up at the same rate then our standard of living remains the same If prices go up and our wages go up at a higher level then our standard of living goes up So…if prices are rising the value of money is going down but standards of living could be rising, falling or staying the same.

What does this picture show?:

What does this picture show? 1970 2000

PowerPoint Presentation:

The Retail Price Index (RPI) Government uses the RPI to measure changes in the value of money Over a number of years it measures the price of a typical basket of goods that a family spends its money on If there is a general rise in prices then the index will rise and the country will experience inflation Inflation is not about one or two goods/services rising in price – it is about the whole basket of goods – a ‘general’ rise in prices However remember that prices (in general) always rise from year so even if inflation is falling it does not mean that there is not a rise in prices it just means that the prices are not rising as fast as they were before

PowerPoint Presentation:

How is the RPI worked out? Government chooses a particular date and calls that the base date . The year in which the base date occurs is called the base year They then work out what is contained in a typical basket of goods – the things that an ordinary family would buy on a regular basis They then record the price of each good and give it a weight according to the importance of this good to the family (the percentage of income spent on each good). If more of the family’s income is spent on food this will have the highest weighting and so a change in price will have a bigger effect on the index Then the price of the whole basket is worked out and is given an index number of 100 in the base year The price of the basket in future years is shown as a percentage change from the base year. If the RPI is 105 in the year after the base year then the basket of goods has gone up 5% If the RPI was 110 the following year there has been a rise in the prices of goods of 10% since the base year

PowerPoint Presentation:

What is the rate of inflation in year 2?

PowerPoint Presentation:

What is the rate of inflation in year 2? 20%

PowerPoint Presentation:

Problems with working out the RPI There is no such thing as a typical family – we all buy differently for example poorer people may spend more of their income on food than the rich; the elderly will have completely different buying patterns than the young The items in the basket change all the time - new things such as computers etc have to be added. As well as adding new items government also rebases the RPI from time to time Prices vary from place to place Buying habits change over time so weightings need to be adjusted A large part of the RPI is the price of housing however this changes according to changes in interest rates – this can distort the RPI figure

PowerPoint Presentation:

Consumer Price Index (CPI) Another price index introduced by the government in recent years is the CPI One of the reasons that the UK government started to use the CPI as well as the RPI is that it removes a couple of the problems we just discussed It does not include spending by the elderly and does not include spending on housing and so it is seen as a truer measure of inflation The Government uses these indices to work out how much it should pay in benefits to the elderly, to the poor, in pensions, tax allowances etc These benefits will have an effect on people’s incomes and therefore what they spend which in turn will have an affect on the prices of goods (supply and demand!!) This is why people say that the price rises reported by changes in the RPI are overstated (are larger than they should be) and the CPI is better. Also other European countries use the CPI so it is a good way of comparing inflation from country to country

PowerPoint Presentation:

Why does government want to control inflation What does this diagram illustrate?

PowerPoint Presentation:

Why does government want to control inflation What does this diagram illustrate? A rise in prices (inflation) pushes workers to demand higher wages which pushes up production costs which are then passed onto consumers Again higher prices lead to workers demanding higher wages which pushes up production costs which pushes up prices This become a vicious cycle where prices keep getting pushed up

PowerPoint Presentation:

The problems caused by inflation Inflation is unfair to creditors (people who are owed money) If money is lent at a fixed interest rate and prices start to rise the value of the interest paid will fall Money used to repay the loan will be worth less than at the time it was borrowed Inflation is unfair on savers The value of people’s savings will fall in times of inflation unless the interest rates are above the rate of inflation Savers will be put off saving Inflation causes a fall in investment Businesses will not invest if there is uncertainty about prices – if they can’t forecast the costs or the revenues of a project they may be reluctant to invest Uncertainty leads to less investment which will mean less growth in production and less growth in employment

PowerPoint Presentation:

The problems caused by inflation Inflation may cause industrial unrest Workers may ask for rises in wages to make up for the rise in cost of living The rise they ask for may be to cover the increase in prices they see today and in addition what they expect in the future (if they have seen continual rise in inflation) If wages increase firm’s costs go up and their prices will increase leading to further inflation – this is known as wage-price spiral If employers try to resist increasing wages this may lead to industrial action (strikes etc ) Inflation may increase imports and decrease exports If prices are rising a country may become uncompetitive internationally leading to a decrease in exports If prices are lower in other countries imports will increase – firms will always try to buy the cheapest inputs to keep their costs down so they may buy these from abroad

PowerPoint Presentation:

The problems caused by inflation Inflation could become hyperinflation If inflation starts to rise rapidly people may lose faith in money – it becomes worthless By the end of 1923 the value of the German Mark was halving in value every hour The price of a newspaper reached 20,000 million Marks This has happened in other countries such as Argentina and Israel http://www.bankofengland.co.uk/education/inflation/map/map.htm

PowerPoint Presentation:

The causes of inflation Cost push inflation When a factor of production increases in price the cost of production increases which pushes up the price of the good or service e.g. oil or wages Demand-pull inflation When supply cannot keep up with demand for goods and services prices will be pushed up Rapid increases in the money supply Money supply is the total amount of money in the economy If people/businesses have more money they will demand more goods and services Increases in demand will push prices up

PowerPoint Presentation:

Government policies to deal with inflation The correct policy to deal with inflation will depend on what is causing it Monetary policy (changing interest rates by the central bank) Government can reduce consumer and business spending by increasing the interest rate The cost of borrowing increases so less is borrowed The problem is that if people stop spending and businesses stop investing this will have a negative effect on growth In the UK the Bank of England’s MPC are in charge of monetary policy Fiscal policy (government spending or taxes) Government can stop spending so much It can also raise taxes so consumers have less income to spend which would reduce consumer demand The problem is that this could cause unemployment – as demand for goods decreases demand for labour will decrease Monetary policy is the main tool used to fight inflation

authorStream Live Help