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Inflation - Coggle Diagram
Inflation
Costs of inflation
reduction in purchasing power of consumers
menu costs
shoe leather costs
fiscal drag
reduced international competitiveness
anticipated inflation
uncertainty
erodes the value of saving
Inflation measurement
1- family expenditure survey is sent to households in the UK
2 - Basket of 650 goods and services
3 - Weights attached according to % of income spent
4 - Base year selected (which has an index of 100)
5 - Index numbers generated
6 - Monthly collection of data. Annual % change measured
7 - Basket of goods and weights changed every year
Main problems of the inflation measurement
Basket may not be representative of all consumers in the economy
Inaccuracies in the data, error in collection
Other countries may use different measures
Takes time for the basket to change
If the basket is changing then comparisons of the past inflation become difficult
Benefits of inflation
workers - they can demand higher wages
firms - incentivises production
workers - less unemployment in recession
stable levels of consumption
definition
general sustained rise in the price level