A Level Economics 81: Inflation

 1. Inflation, Disinflation, Hyperinflation, and Deflation:

a. Inflation: Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. When inflation occurs, each unit of currency buys fewer goods and services than it did before. Moderate inflation is considered normal in healthy economies as it can encourage spending and investment.

Example: If the inflation rate is 3%, a basket of goods that cost $100 last year will cost $103 this year.

b. Disinflation: Disinflation is a decrease in the rate of inflation. It means that prices are still rising, but at a slower rate compared to a previous period. It does not mean a decline in prices (deflation).

Example: If the inflation rate was 5% last year and is now 3% this year, it represents disinflation.

c. Hyperinflation: Hyperinflation is an extremely high and typically accelerating rate of inflation. In hyperinflationary situations, the value of a country's currency declines rapidly, leading to a loss of confidence in the currency.

Example: In a hyperinflationary economy, prices may double every few days, leading to a collapse of the country's monetary system.

d. Deflation: Deflation is the sustained decrease in the general price level of goods and services in an economy over time. It is the opposite of inflation and can be caused by a decrease in consumer demand or an increase in the supply of goods.

Example: If the inflation rate is -2%, a basket of goods that cost $100 last year will cost $98 this year.

2. Calculation of Inflation via Weighted Changes in Price Indices:

Inflation is commonly calculated using a price index, such as the Consumer Price Index (CPI) or the Producer Price Index (PPI). These indices measure changes in the price of a basket of goods and services over time. The steps to calculate inflation are as follows:

1. Select the Base Year: Choose a base year against which changes in prices will be measured. Usually, the base year index is set at 100.

2. Gather Price Data: Collect price data for a representative basket of goods and services.

3. Assign Weights: Assign weights to each item in the basket based on their relative importance in consumer spending. These weights represent the proportion of consumer spending allocated to each item.

4. Calculate Price Index: Calculate the price index for each period by dividing the total cost of the basket in that period by the total cost in the base year and multiplying by 100.

5. Calculate Inflation Rate: Calculate the inflation rate by comparing the price index of the current period with the price index of the base year, expressing the change as a percentage.

Example: Suppose the price index for the base year is 100 and the current year's price index is 110. The inflation rate would be (110-100)/100 * 100 = 10%.

3. Multiple Choice Questions (MCQs) on Inflation Indices:

1. What is the purpose of using a price index to measure inflation? a) To measure changes in the money supply b) To compare prices between different countries c) To track changes in the general price level over time d) To calculate changes in GDP

   Answer: c) To track changes in the general price level over time.

2. Disinflation occurs when: a) Prices are increasing at a slower rate b) Prices are decreasing c) Prices are increasing at an accelerating rate d) Prices remain constant

   Answer: a) Prices are increasing at a slower rate.

3. Hyperinflation is characterized by: a) A very low and stable inflation rate b) A high and stable inflation rate c) An extremely high and accelerating inflation rate d) Deflation

   Answer: c) An extremely high and accelerating inflation rate.

4. The Consumer Price Index (CPI) measures changes in: a) The prices of goods and services purchased by businesses b) The prices of goods and services purchased by consumers c) The prices of goods and services produced by businesses d) The prices of capital goods

   Answer: b) The prices of goods and services purchased by consumers.

5. Deflation occurs when: a) The rate of inflation is positive but low b) The rate of inflation is negative c) The rate of inflation is extremely high d) The rate of inflation is stable

   Answer: b) The rate of inflation is negative.

4. Major Measures of Inflation in the UK and Differences:

In the UK, the major measures of inflation are:

1. Consumer Price Index (CPI): Measures changes in the prices of a basket of goods and services purchased by households. It is the primary indicator of consumer inflation.

2. Retail Price Index (RPI): Similar to CPI but includes mortgage interest payments, making it slightly higher than the CPI.

3. Producer Price Index (PPI): Measures changes in the prices of goods and services at the wholesale level.

Differences:

• CPI focuses on consumer goods, while PPI focuses on wholesale prices.
• RPI includes housing costs like mortgage interest payments, whereas CPI does not.
• RPI is typically higher than CPI due to the inclusion of housing costs.

5. Multiple Choice Questions (MCQs) on Inflation Index Numbers:

1. The Consumer Price Index (CPI) is used to measure changes in the prices of goods and services: a) Purchased by businesses b) Purchased by consumers c) Produced by businesses d) Purchased by the government

   Answer: b) Purchased by consumers.

2. The Retail Price Index (RPI) differs from the Consumer Price Index (CPI) because it includes: a) Mortgage interest payments b) Business investment c) Producer prices d) Government expenditure

   Answer: a) Mortgage interest payments.

3. Which inflation index is the primary indicator of consumer inflation in the UK? a) Consumer Price Index (CPI) b) Retail Price Index (RPI) c) Producer Price Index (PPI) d) Wholesale Price Index (WPI)

   Answer: a) Consumer Price Index (CPI).

4. The Producer Price Index (PPI) measures changes in the prices of goods and services at the: a) Consumer level b) Wholesale level c) Retail level d) Government level

   Answer: b) Wholesale level.

5. The Retail Price Index (RPI) is generally higher than the Consumer Price Index (CPI) because of the inclusion of: a) Taxes and duties b) Housing costs, such as mortgage interest payments c) Consumer durable goods d) Business investment

   Answer: b) Housing costs, such as mortgage interest payments.

Economics Essay 53: Inflation

 Outline two measures of inflation in the UK and explain how they are calculated.

wo commonly used measures of inflation in the UK are the Consumer Price Index (CPI) and the Retail Price Index (RPI). Let's explore how they are calculated:

1. Consumer Price Index (CPI): The CPI measures changes in the average price level of a basket of goods and services consumed by households. It covers a wide range of goods and services, including food, clothing, housing, transportation, education, healthcare, and recreation. Here's a general overview of how CPI is calculated:

a. Basket Selection: A representative basket of goods and services is selected based on the spending patterns of households. The composition of the basket is periodically reviewed to ensure it reflects current consumption patterns accurately.

b. Price Collection: Prices for the items in the basket are collected on a regular basis from various outlets, including retail stores, service providers, and online platforms.

c. Weighting: Each item in the basket is assigned a weight based on its importance in the average household expenditure. The weights are determined by conducting surveys and analyzing expenditure data.

d. Price Index Calculation: The price index is calculated by comparing the current prices of the basket items to their prices in a base year. The prices are multiplied by their respective weights, and the weighted price changes are summed to derive the overall index.

e. Inflation Calculation: The inflation rate is then calculated as the percentage change in the CPI index between two periods.

2. Retail Price Index (RPI): The RPI is another measure of inflation that includes a broader range of goods and services compared to the CPI. The RPI was traditionally used as the main measure of inflation in the UK but has been largely superseded by the CPI. Here's a brief explanation of how the RPI is calculated:

a. Basket Selection: Similar to the CPI, a basket of goods and services is selected to represent household expenditure patterns. However, the RPI basket tends to include a higher proportion of housing-related costs, such as mortgage interest payments and council tax.

b. Price Collection: Prices for the items in the basket are collected from various sources, including retailers, service providers, and housing providers.

c. Weighting: Each item in the basket is assigned a weight based on its importance in household expenditure. The weights are derived from expenditure surveys and other data sources.

d. Price Index Calculation: The RPI index is calculated by summing the weighted price changes of the basket items. Unlike the CPI, the RPI uses a different mathematical formula known as the Carli formula, which tends to give slightly higher weight to price changes.

e. Inflation Calculation: The inflation rate is determined as the percentage change in the RPI index between two periods.

It's worth noting that both the CPI and RPI calculations undergo periodic revisions to reflect changes in consumption patterns and improve the accuracy of inflation measurement. These measures provide valuable insights into changes in the cost of living, price stability, and the overall health of the economy.

JNU: Nationalism and India's Uncivil War

 

A Brief History of the Indian Left

 

Economics for Non Economists 5 – Inflation - Why is the government’s inflation rate lower than my personal experience?

By Girish Menon

Some of you would have realised that in the China virus season the supermarkets have raised prices and stopped offering discounts on many goods. As a result you would have experienced rising food bills which according to layman knowledge should translate into inflation*. At the same time, you may have read many economists predict a period of recession, deflation** and high levels of unemployment. So how is it that when you are experiencing inflation personally, economists predict the existence of deflation?

It all depends on the way the inflation rate is calculated.

The UK government uses the Consumer Price Index (CPI) to estimate the inflation rate in the British economy. It works like this:

1. Every year a few thousand families are asked to record their expenditure for a month. From this data the indexers estimate the types of goods and services bought by an average household and the quantity of their income spent on these goods.

2. With this information, surveyors are sent out each month to record prices for the above mix of goods. Prices are recorded in different areas of the country as well as in different types of retail outlets. These results are averaged out to find the average price of goods and this is converted into index numbers.

3. Changes in the price of some goods are considered more important than others based on the proportion of the income spent by the average household. This means that the above numbers have to be weighted before the final index is calculated. 

---Topics covered earlier

Relation between Debt and Profit

Explaining GDP and Economic Growth

Quantitative Easing

What is a Free Market

---

Consider this example:

Assume that there are only two goods in the economy, food and cars. The average household spends 75% of their income on food and 25 % on cars. Suppose there is an increase in the price of food by 8% and of cars by 4% annually.

In a normal average calculation, the 8% and 4% would be added together and divided by 2 to arrive at an average inflation of 6%

However, this provides an inaccurate figure because spending on food is more important in the household than spending on cars. Food is given a weight of 75% and cars are given a weight of 25%. So the price increase of food is multiplied by ¾ (8*3/4 = 6) and added to the price increase of cars which is multiplied by ¼ (4*1/4 =1) which will result in an inflation of 7%.

Therefore if the inflation index was 100 at the start of the year then it will read 107 at the end of the year.

The accuracy of inflation calculations

As the example makes clear this calculation is based on an imagined average family’s spending patterns. There maybe only a few families in the UK that have the exact same spending patterns as imagined by the government.

Theoretically, different rates of inflation could be calculated within an economy by changing the consumption patterns or weightings in the index. This will explain why the inflation that you experience may be higher or lower than the government’s inflation rate.

* Inflation is an average increase in price level compared over a previous period.

** Deflation is an average decrease in price level compared over a previous period.

Disinflation means the inflation in the current period is lower than the earlier period.

The Story of India's Communists - Hindi

Reinventing communism can help both the CPI and India

Anand B in The Hindu




The Communist Party of India and its ideology seem to have lost a bit of its sheen in the last three decades, today peeking shyly from the Kerala undergrowth. Time to take to the streets — er, the social media? | Wikipedia

December 26, 1925, was the day the Communist Party of India considers as its foundation day. The party is now 92 years old. There are 84 parties that branched out from this party and follow communism today. This is, however, not about the party leaders or the staunch followers of communist philosophies in the party. This is more about actual communist and socialist workers — people who believe in communism and socialism regardless of their being a member of any affiliated parties.

The communist parties have succeeded in alienating themselves and the communist philosophy as a whole from the youth. Sure, the parties have members under the age of 35. But again, this isn’t about the party or its student-body members.

This is about the man (or woman) who works hard every day to earn a living. The man who no longer cares about philosophies or society as a whole. With the advent of technological advances, communism or Marxism has been left behind. Unfortunately, it is not Marx’s fault. He welcomed technology. He never recommended the destruction of the means of production; he asked the workers to seize it for the greater good. 
The IT and BPO industry sans unions have completely blocked a section of society — a vibrant section — from the philosophies and, subsequently, the parties too. An industry which attracted a whole generation for over two decades now has been kept away from the Left and this has crippled the spread of the ideology as well as its philosophy and politics greatly.

How did communism grow?

To delve a bit deeper, let us take a look at how communism spread. It did not spread merely through charismatic oratory figures or sectarian ideologies like caste or language. It spread from the bottom up. It spread from the workshops. It spread from the factories. It spread from weavers. It spread from the farmers. It spread in the form of trade unions. It spread in the form of student bodies. It spread based on the success it had in the form of USSR, which went toe to toe with the United States.

This meant a person who was to eventually join the party would first have to be attracted by its ideology and the philosophy. This was achieved by a propagandisation of the benefits one would get as a member of the proletariat as much as the power of the workers’ rights against the exploitation they were subjected to. It was done by apprising the worker of their rights. Grassroots propagandists like Jeevanandam or Jyoti Basu or E.M.S. Namboodiripad, who went on to become leaders, greatly helped in taking this message to the common man.

What changed?

The factors that helped in spreading the ideology largely disappeared during the final decade of the last century.

With the globalisation of the Indian Market, the death of the USSR, and the absence of grassroots propagandist leaders in the league of EMS or Jeevanandam, the party and its ideology have come in for hard times. The current party leaders confining their discourse largely to politics is not helping either. Not to mention, the mass influx of American culture along with the growth of the IT/BPO industry further dented its reach — the youth became more interested in seizing the day than seizing the means of production. And then, when the communists of the country started to set themselves against both globalisation and pop culture, they completely alienated the present generation, and they were forced to retreat to the universities in the north and factories in the States they ruled.

But they do exist. The philosophy, like all others, cannot be killed so long as even one person believes in it — indeed, even if no individual believes in it. The communists, however, are no longer as ideologically relevant or politically dominant as they used to be and should be to keep the social balance. Nor are they spreading the word as effectively as they used to.

The fact that they still limit themselves to talking about farmers and factory workers is ensuring that a young section of society finds communism or socialism an alien concept. Without meandering into the partisan part of it, being unrelatable is not doing the philosophy or the ideology any favours.

The need for communism

So, why bother with rejuvenating a dying movement? Because the need for communism and socialism is now higher than ever. When the Right gets stronger, the Left is needed to balance it out just as the Right balances the Left. Like the force from Star Wars, the balance of power needs to be restored.

On the personal front, the youth no longer are interested in hunger unless it is their own. They are not interested in problems until it affects them. By living each day for itself, we, the youth, have forgotten the lessons the past taught us and ignore the impact that forgetting these lessons can have on the future. Likes, Shares and Retweets are the highest form of response you can get for actual issues from other members of the proletariat today. All their intelligence and ability to understand politics and social structures is being squandered as they spend all of it on pop culture. The politics in House of Cards and Game of Thrones is more interesting than the actual politics that affect them on a day-to-day basis.

Seeing the bigger picture, unchallenged power corrupts. Congress — left of Center under the leadership of Rahul Gandhi — is just not enough. With the currently weak leadership in the party, be it at the regional or national level, Congress is not even a challenge for someone like Modi. As much as we need the aggressive development BJP promises, we also need to have checks and balances politically.
The news channels are not helping. They are giving more coverage to moralistic or mundane controversies (Padmavati, Trump tweets) than actual issues of economic and ecological significance (GST implementation, education sector woes). It is easier to distract the news channels than to distract the youth. Thanks to the TRP race, the current hot issue matters more than the ones that are important to the country as a whole in the long run.

Socialistic and Communist thinking could be the perfect cure for these modern-day ills and help create a future generation that is aware of the hows and whys of the policies that affects them. Taking the thinking to the youth and first-time voters will help the country greatly. The parties that follow Marx are the ones who should take ownership with this. They are better equipped to take this responsibility than anybody else.

What can they do?

Marx talks more about factories in his manifesto than agriculture. Lenin is credited with bringing in farmers into the fold of socialism and communism — he brought in the sickle and made the philosophy relevant to a larger audience.

Instead of limiting themselves to Marx’s writing, they need to evolve, much like Lenin, and reach out to the larger audience on the issue that affects them. They lost a wonderful opportunity during the recession-driven IT layoffs, for instance, to emphasise their philosophical importance.

Just like they went to universities to reach students, went to factories to reach workers and to farms to reach farmers, they need to go where the youth are concentrated today — the social media.

The philosophy needs to go into their handheld device, those we spend more time with than our better halves or parents. It is up to the party to take it there, to them, with a renewed set of issues that can be solved or mitigated by the application of socialism. This cannot involve merely creating an app which echoes the leaders’ political critique of Modi’s policies but also about creating awareness about the philosophy as a whole in a simple and reinvented ways. They also need to acknowledge that the present generation seeks out the trappings of global pop culture to decide which ideas to consume. Therefore, communism needs to outgrow the books and literature that helped propagate the philosophy in its heyday and be more proactive in its outreach.

Failure to evolve will result in extinction. And socialism/communism is one philosophy that needs to exist in our country and survive as a counterbalance for the other side. The ball is in the parties’ court for now, as always. It is up to them to decide on what to do with it, for it decides their future and ours.