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Inflation - Coggle Diagram
Inflation
Definitions:
Inflation = General increase in the average prices prices in the economy over a sustained period of time
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Limitations of CPI
- impossible to account for every good sold in the country
- different households spend different amount on goods
- doesn't include prices of houses so its lower than RPI
- cant make comparison to historical data
Causes of Inflation:
Demand Pull inflation= prices in the market are determined by a shift in the demand curve ( this means an increase in the aggregated demand)
Cost Push inflation = Decrease in aggregated supply causes an increase inflation. This is when the cost of supply increases so the prices are made to go up
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Costs of high inflation
Redistribution effect = when the rate of inflation is different to what was anticipated, savers lose on money and the people borrowing gain.
Lose of international competition = imports become less expensive and exports become more pricey for he foreign buyers
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Limitations of RPI
- RPI excludes the top 4% and the lower income pensions as it doesn't account for the average
- RPI is no longer considered the best method
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