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 The RPI was traditionally used as the main measure of inflation in the UK but has been largely superseded by the CPI.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.

Oxfam's dodgy calculations?

 

Economics for Non Economists 3 – Explaining GDP and Economic Growth

By Girish Menon

Introduction

You will have recently read:

-     At 13%, Economist Intelligence Unit Pegs India's Growth In 2021 Higher Than IMF

-    Western economies recovering faster than expected from Covid, says IMF

 -   UK GDP rose 0.4% in February

 -  China's economy grows 18.3% in post-Covid comeback

 

What does this mean?

Just like the Forbes magazine compiles an annual list of the richest individuals on planet earth, most countries participate in an annual ‘show of wealth’. The most commonly used measure in this competition is called GDP. At the end of 2019 the top six countries were:

Table 1

Country	GDP ($ trillions)	Economic growth over previous year (%)	Per Capita GDP ($)	Share of World GDP (%)
USA	19.5	2.2	59, 939	24
China	12.2	6.9	8,612	15
Japan	4.9	1.7	38,214	6
Germany	3.7	2.2	44,680	4.5
India	2.7	6.7	1,980	3.28
UK	2.6	1.8	39.532	3,26

SourceWorldometers

What do these terms mean?

Simply defined, GDP or Gross Domestic Product is the money value of all goods and services (goods) produced within an economy in a period of time. In Table 1 the GDP is estimated over the year of 2019. The data quoted in the introduction compares GDP changes over the first two quarters of 2020.

Economic growth is a measure of the additional goods produced by an economy over the last period of time  (say a year or a quarter).

Per Capita GDP means the value of goods each resident would get if all goods produced in an economy is shared equally. This is calculated by dividing the GDP with the residents of the country. Do you think per capita GDP is an accurate description of how goods are actually distributed in an economy?

Share of World GDP means the share of global goods produced by an economy. This is calculated by dividing each country’s GDP with the whole world’s total GDP.

Why is GDP and the rate of Economic growth so important?

Materialism is the underlying principle of using GDP and economic growth as the most important indicator of economic performance. Materialism, according to the Cambridge English Dictionary, is the belief that having money and possessions is the most important thing in life. It follows that as one’s material goods increases one’s standard of living (happiness) tends to increase.

GDP is a tool that measures the volume of material goods produced by an economy. A high rate of economic growth demonstrates the rate at which the material goods in an economy is increasing and as a result the happiness of the residents as well. So, when the rate of economic growth becomes negative, as in the data mentioned in the introduction, it follows that your happiness will decrease.

Are GDP and GNP the same?

They are similar but not the same. GDP measures the volume of goods produced by people living within the boundaries of an economy. The output of Nissan’s Sunderland plant will be included in UK’s GDP. In other words the output of Britons and foreign nationals living in the UK will be added to calculate UK’s GDP.

GNP stands for Gross National Product. It is a measure of the volume of goods produced by British nationals living in the UK and outside. It will exclude the output of foreign nationals (say Nissan Sunderland) operating within the British economy.

Is GDP an accurate measure of the volume of goods produced within an economy?

The answer is No. The calculation is arduous and with questionable assumptions which I will not go into here. I will however mention some weaknesses here:

1. Even though there are some standardised procedures for its computation governments are known to deliberately intervene in its methodology and computation.

2.   Not all goods are included. For example if you clean your own house and look after your family – these services are not included. However, if you employ a cleaner, a cook, a nanny and a driver then their services are included.

3.   In some countries where there is a large informal economy. The goods produced by such activities are not be included in GDP computations.

Does an increase in GDP necessarily improve residents’ happiness?

In economics, happiness is better known as welfare.

If there is an earthquake in your country and many roads, buildings, bridges, stadia are destroyed. Then rebuilding them will increase the national GDP but has it improved the citizens’ welfare?

As a resultant of economic growth the quality of air you breathe has gone down and the water supply is polluted. Has this improved your standard of living?

Due to increased standard of living everybody has a car and you are now required to spend one hour extra in commuting time. Has this resulted in improved happiness?

What is the prognosis for GDP and economic growth?

It appears that due to Covid-19 the GDP of most nations will be lower than in 2019. These economies will have negative economic growth which means that in 2020 they will produce fewer goods than in 2019.

When the GDP falls, the terms most used are recession and depression. The difference between the two according to Harry Truman is ‘It's a recession when your neighbour loses his job; it's a depression when you lose yours’ .

As you have seen in the news, firms are busy firing staff which means there will be increased unemployment. Since more people are unemployed they will not have money to buy goods in the future and so there will be even less demand for goods in the future and those who have jobs today may lose their jobs next year in a downward spiral of negative economic growth begetting even more negative growth.

Will there be lower emphasis on GDP and economic growth in the future? For such a change to happen there needs a material change in organising the world economy. (If you wish to read further click here)

I hope it happens in my lifetime.

* - annualised rate

---Also watch

How the Economic Machine Works by Ray Dallio

Ronaldinho - He Always Brought a Smile to Your Face

Sid Lowe in The Guardian


Ronaldinho. See? You’re smiling already. Just thinking about the things he did and the way he did them, the way he was, gets you giggling. Look him up on YouTube and maybe you’ll fall for him all over again, a bit like all those defenders. Watch for long enough – it won’t take long – and you might even feel like standing to applaud, just like the Santiago Bernabéu did, an ovation for a Barcelona player, as if for all the rivalry they hadn’t so much been beaten by his genius as shared in it. Sergio Ramos was on the floor, they were on their feet. Cameras zoomed on a man in the north stand with a moustache and a cigarette hanging limp from his lip. Bloody hell, did you see what he just did?

Golden Goal: Ronaldinho for Barcelona v Chelsea (2005)



It’s a question that was asked a lot. What Ronaldinho did, no one else did. And it wasn’t just what he did; it was the way he made people feel. Nostalgia, memories, are about that: not so much events but emotions. Watching Ronaldinho was fun, it made people happy. Those may be two of the most simple, childish words of all but they are the right ones. Football stripped right down to its essence: happy, fun.

Funny, too.

There may never have been a player who made the game as enjoyable as Ronaldinho, in part because he played and it was a game. “I love the ball,” he said. One coach, he recalled, told him to change, insisting that he would never make it as a footballer, but he was wrong. It was because he played, because he enjoyed it, that he succeeded: the grin on his face was not just there after he won the league, the Champions League, the World Cup and the Balon d’Or, it was there while he won them. It became contagious. “He changed our history,” Barcelona midfielder Xavi Hernández said.

One Real Madrid director claimed that Madrid hadn’t signed him because he was “too ugly” and would “sink” them as a brand. “Thanks to Beckham, everyone wants to shag us,” he said. He, too, was wrong: everyone wanted to embrace Ronaldinho, enjoy him. The long, Soul Glo hair, the goofy grin, that surfer’s “wave”, thumb and little finger waggling – a gesture so his, so symbolic of Barcelona’s revival that is was fashioned from foam and sold in the club shop.

An entire publicity campaign was built around him, the embodiment of “jogo bonito”. He might not have been beautiful but his game was and no one was more attractive, a marketing dream Madrid missed. Almost a comedy cartoon character himself, he inspired the “BarcaToons” and on Spain’s version of Spitting image his puppet giggled and laughed and repeated one word over and over: fiesta!. “I am like that,” he admitted.

On the pitch, too, an extension of that expressiveness. “When you have the ball at your feet, you are free,” Ronaldinho wrote in an open letter to his younger self, repeating a mantra: creativity over calculation. “It is almost like you’re hearing music. That feeling will make you spread joy to others. You’re smiling because football is fun. Why would you be serious? Your goal is to spread joy.” He said that was the way his father, a shipbuilder and football fan who worked weekends at Gremio’s ground, had told him to play. His older brother Roberto was at Gremio too. And then, growing up, there was Bombom, his dog. He also played.

Ronaldinho’s brother was his idol but he ended up better than him. He was better than anyone at the time: you genuinely wondered if he might end up better than anyone else ever. It didn’t last long enough for that but it lasted because he did things you’d never witnessed before, skills most never imagined let alone replicated, and that emotion remained. “His feet are so fast he can touch the ball four times in half a second. If I tried to do what he can do, I’d end up injuring myself,” Philippe Cocu said.


He might not have been beautiful but his game was and no one was more attractive, a marketing dream Madrid missed.


For three years no one could match the wow, the wonder, the silliness, the jaw-dropping, laugh-out-loud daftness of it all. The back-heels, step-overs and rubber ankles, the power too, the change of pace, the passes without looking. The passes with his back, for goodness sake. The free-kicks over the wall, round the wall and under it. Nutmegs, lobs, bicycle kicks, everything.

An advert featuring Ronaldinho showed him ambling to the corner of the penalty area, pulling on new boots, flicking a ball into the air and keeping it there. Strolling around the area, he volleys the ball towards goal. It hits the bar and comes straight back to him, he controls it on his chest, swivels and volleys it goalwards. Again, it hits the bar and comes back. He controls it again and, still without letting it drop, hammers it goalwards a third time. For a third time, it thuds off the bar and sails straight back. Without letting the ball drop, he strolls back to where he started, sets it down and smiles. On the boots is stitched the word “happiness.”

Ronaldinho surrounded by four Celtic players during a Champions League match in March 2008. Photograph: Dave Thompson/PA

It is quite astonishing; it is also a fake, a montage. Or was it? There was a debate. You didn’t know – and that was the point, the measure of him. The fact that anyone could even begin to believe that such a nonchalant demonstration of mastery might be genuine was eloquent – and only with Ronaldinho would they. That didn’t happen, no, but the Bernabéu ovation did. So did the shot thundering in of the bar against Sevilla – at 1.20am. The goal against Milan. That toe-poke against Chelsea. “It’s like someone pressed pause and for three seconds all the players stopped and I’m the only one that moves,” he said.

The Brazilian legend Tostao claimed: “Ronaldinho has the dribbling skills of Rivelinho, the vision of Gerson, the spirit and happiness of Garrincha, the pace, skill and power of Jarzinho and Ronaldo, the technical ability of Zico and the creativity of Romario.” Above all he had one, very special ability: he made you smile.

An Ultimate Example of Cost Benefit Analysis

Brilliant pupil's 'logical' suicide




By Louise Jury



Thursday, 3 December 1998

A BRILLIANT schoolboy shot himself in the head after carefully calculating the benefits of life and deciding it was not worth living, an inquest was told yesterday.

Dario Iacoponi, 15, a pupil at the London Oratory in Fulham, west London, which is attended by Tony Blair's two sons, Euan, 14, and Nicky, 12, kept a diary of his philosophical thoughts on life in the two months leading up to his death. The Oratory is one of the top Roman Catholic schools in the country.



After weighing up the pros and cons, he decided to commit suicide and planned it meticulously. He taught himself to use his father's shotgun and worked out how to fire it with a wooden spoon. He then waited until neither of his parents was at home before carrying out the plan last month.



Dr John Burton, the West London Coroner, said it was clearly a considered process and Dario "came down on the side of suicide".



The inquest was told that the teenager was a brilliant pupil who had already passed six GCSEs at A* or A grades a year early. He played the violin and piano and was hoping to study law at Yale or Harvard.



But a darker side to his character emerged in diaries found by police. They spoke of his difficulties in coping with life, although there was little, or no mention, of any specific problem such as bullying.



Dario, an only child, was found by a 20-year-old lodger at the family's home in Ealing, west London. He had a shotgun by his side.



His father, Pietro, a translator, was in Switzerland on business, and his mother, Saleni, a teacher, was at an amateur dramatics class.



Inspector Colin Nursey, who found five diaries covering the last year of Dario's life, said there was a reference in them contemplating suicide. "He would not leave a note, he was very specific about that," he said.



Neither parent was in court, but Nadia Taylor, a family friend for the past 15 years, told the inquest that Dario was "always a very sociable and very friendly person". She added: "We are all very shocked. It all came as a surprise to us that he felt this way."



But Dr Burton said he could see no other conclusion than that Dario had taken his own life. "He has made it clear that he did so. That is the only verdict that I can return.



"He was quite stoical about it. He did not fear death. He decided on balance that life is not good and points out that the mathematics he has used are indisputable."



Dario's headmaster, John McIntosh, has said he was baffled and the school shocked. "He was an extremely able boy and he got on well with other pupils and his teachers and was extremely happy at school."