• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economic problems of Inflation.

Extracts from this document...

Introduction

Joe Levy Economics Homework RPI - The Retail Price Index is the main measure of inflation in the UK. It shows the amount prices have increased for spending on an average basket of goods. It is weighted to reflect the fact some price changes are more important than others. The weights are based on the Family Expenditure Survey which surveys a wide range of families to see how they spend their money. Like all index numbers it has a base year, and all changes are expressed as percentage changes around that base. RPIX - RPIX is an adjusted measure of inflation. It is often alternatively known as the "underlying rate of inflation". It is the basic Retail Price Index adjusted for the effects of changes in interest rates. As interest rates are increased (to counter inflation), this will tend to lead to an increase in mortgage rates. Because mortgage costs are included in the RPI as a measure of the costs of housing, this will lead to an increase in the RPI. ...read more.

Middle

The problems of a wage-price spiral - price rises can lead to higher wage demands as workers try to maintain their real standard of living. Higher wages over and above any gains in labour productivity causes an increase in unit labour costs. To maintain their profit margins they increase prices. The process could start all over again and inflation may get out of control. Higher inflation causes an upward spike in inflationary expectations that are then incorporated into wage bargaining. It can take some time for these expectations to be controlled. Higher inflation expectations can cause an outward shift in the Phillips Curve. Consumers and businesses on fixed incomes will lose out. Many pensioners are on fixed pensions so inflation reduces the real value of their income year on year. The state pension is normally updated each year in line with average inflation so that the real value of the pension is not reduced. Shoe leather costs - when prices are unstable there will be an increase in search times to discover more about prices. ...read more.

Conclusion

Unemployment wastes some of the scarce resources used in training workers. Furthermore, workers who are unemployed for long periods become de-skilled as their skills become increasingly dated in a rapidly changing job market. This reduces their chances of gaining employment in the future, which in turn increases the economic burden on government and society. See the revision page on long term unemployment. Rising unemployment is linked to social and economic deprivation - there is some relationship between rising unemployment and rising crime and worsening social dislocation (increased divorce, worsening health and lower life expectancy). Areas of high unemployment will also see a decline in real income and spending together with a rising scale of relative poverty and income inequality. As younger workers are more geographically mobile than older employees, there is a risk that areas with above average unemployment will suffer from an ageing potential workforce - making them less attractive as investment locations for new businesses. It is clear therefore that unemployment carries substantial economic and social costs. These costs are greatest when long-term structural unemployment is high. Indeed many governments focus their Labour market policies on improving the employment prospects of the long-term unemployed. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    How can inflation be reduced?

    5 star(s)

    Governments are scared to raise taxes because the attitude of the voter (they might not vote for them because of tax changes). Also because monetary policy has proven very effective central banks are more inclined to use it as a reduction technique.

  2. What are the economic effects of inflation?

    Greater menu costs can also affect growth. For a large company these increased menu costs would affect the total cost of production and could reduce profitability. Another factor that could affect growth is the fact that speculative investment rather than productive investment can take place during a period of high inflation.

  1. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    'The monetarist view of inflation, encapsulated in Milton Friedman's dictum, inflation is always and everywhere a monetary phenomenon...Inflation occurs when the growth of the money supply persistently exceeds the growth of real output' (McAleese, D., 2004, p281). This can also be shown graphically as: McAleese, D., (2004, p281)

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    affected, the government will still allow foreign workers to come in to help the economy." (Asrul Hadi Abdullah Sani, Foreign Worker Levy Hike in 2011, 20 may 2010) Since the supply of local workers is very limited, many business owners would rather employ foreign workers.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    This change made by Clarke may not seem like a very important factor but this is not the case. Prior to this the decision as to what would happen to interest rates had often been taken for political reasons as opposed to economic ones.

  2. Budget 2004-05 and Economic Analysis of Pakistan

    and 2004-2005 (budget) is given in Table below: (Rs. in Million) 2003-2004 2004-2005 Classification Budget Revised Budget * RESOURCES (a + b) 767298 783356 842620 * Internal Resources 608169 638536 686265 Revenue Receipts(Net) 513536 549572 557165 Capital Receipts(Net) 36677 39789 64439 Financing by Provinces for PSDP 29990 34845 33110 Change in Provincial Cash Balance 27967 14331 31551 * External

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    government spending or a rise in exports due to strong economic growth in other countries. In Figure 6.0, if output increases from Q1 to Q2, the price level also rises from P1 to P2. This rise in output will cause a fall in unemployment.

  2. Discuss the idea that if the economyis to prosper in the long run, the ...

    Economising on cash balances requires time and effort. For example, individuals have to make more visits to the bank and other financial institutions to withdraw money. This has been termed the 'shoe leather' effect of inflation. In general, there is also a loss of convenience associated with the holding of a liquid asset.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work