How can inflation be reduced?
How Can Inflation Be Reduced? Inflation is a persistent rise in average price level over a year, it is measured through CPI (Consumer Price Index). CPI takes a basket of goods ,which are weighted due to expenditure in a household budget (so you spend more money on food then shoes therefore food has a higher weight). CPI then looks at how the prices have changed and dictates a rate in accordance to the statistics. Inflation usually carries negative connotations as it usually comes in conjunction with economic instability therefore many different methods have been devised in order to avert the problems of inflation and reduce it. An example of high inflation which was reduced is in Britain. In the 1970's inflation was phenomenal and peaked at over 20%, through successful monetary policy however this was mitigated. By raising interest rates it reduces the growth of aggregate demand it encourages saving (which would stifle consumer spending and investment) as well as reducing disposable income. Monetary policy is a proven technique used to reduce inflation. Favoured by the US and UK it looks at the modification of interest rates in order to control inflation (and reduce) this is know as tightening monetary policy. Monetary policy is the control of money supply by the central bank (so in Britain it is the Bank of England and in the US it's the Federal Reserve). Inflation can
I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article
Recently in United Kingdom- a powerful and wealthy economy, there has been an issue being discussed with growing worry. The problem, not so strange to most countries in the world, is inflation, more specifically "the surge in UK inflation rate" in 2005. I will be evaluating on the article "UK inflation drops to Bank target" by the BBC which only focuses on this problem. Brief summary: The main issue in the article is the drop in the inflation rate in 2005 in three successive months, what causes have led to such a decrease after months of increasing inflation, what actions have been taken to bring down the rate of inflation and the effects that such a drop created. The major concepts involved in the article are inflation itself, CPI, RPI, inflation rate, cost push inflation, interest rate. The first concept, inflation itself is actually a sustained increase over a period of time in the general price level, in other words a fall in the real purchasing power of money. To understand about inflation, another concept is involved which is CPI: The consumer price index (CPI)-the measure of the consumer price level. What is CPI? CPI reports the cost of a fixed "market basket" of consumer goods and services over time. The formula of calculating CPI for a particular year is found as follows: Price of the most recent market basket in the particular year CPI =
The aim of this essay is to discuss the relevance of John Keynes to the current macroeconomic situation in the UK.
The aim of this essay is to discuss the relevance of John Keynes to the current macroeconomic situation in the UK. Macroeconomics can be defined as "the study of whole economic systems aggregating over functioning of individual economic units" (Bannock G, 2003: 236). It considers aspects of the economy from a government perspective such as the general price levels in an economy instead of a price level in a single market. John Keynes and economists who share a similar view to his on macroeconomics strongly believe that an economy will frequently settle below full employment. In such a situation aggregate supply will most likely be price elastic and increases in aggregate demand will mainly affect output. Keynes theory suggests government intervention through demand side policies in order to boost aggregate demand and reduce unemployment. However, Keynes theory is opposed by classical economists who believe that an economy will be at full employment and as a result demand side policies implemented by the government with the intent to boost demand will likely lead to an increase in prices and cause inflation. On the contrary to Keynes's recommendation classical economist insist government should implement supply side policies aimed at shifting aggregate supply to the right (Gillespie. A, 2007: 307). The government of any economy will set policies in order to achieve set
To what extent is inflation a serious economic problem.
To what extent is inflation a serious economic problem Inflation is defined as the general and sustained increase in prices of goods and services. It is caused by many factors, but in particular three factors have a major effect on the value of inflation. The first cause is too much demand within the economy. This occurs when an increase in demand cannot be countered by an increase in production in the short term due to fixed factors (e.g. land) and so producers will increase the prices to decrease demand for their products. Aggregate demand, the demand within the whole economy, suddenly rises for a product for two reasons in particular. The first is that inflation has been so low in the economy that tax revenue, for example has been falling, due to less spending and increased saving, so in order to 're-flate' prices. They provide subsidies and ask for a lowering of interest rate to boost spending and 're-flate' the economy. The second reason maybe that greater consumer confidence within the economy has lead to increased spending and thus Aggregate demand increasing. This will mean that prices for consumers have risen, due to producers 'pulling' up their prices. There could be a disadvantage to pulling the prices up. To begin with, by pulling prices up, in the future, demand will fall and we will see that profits fall for producers, as a result of less revenue. Thus
Economic and Social consequences of Unemployment
Economic and Social consequences of Unemployment Unemployment has both social and economic costs. According to ILO (International Labor organization), unemployment is defined as, '' people of working age who are without work, available for work and actively seeking employment.'' In other words, it is a state of an individual looking for a job but not having one. Unemployment is one of the factors crucial in determining the economic stability of a country. There are several factors which might lead to unemployment such as labor market conflicts (trade-unions) and downturns in economy. Seasonal unemployment occurs when a person is unemployed or their profession is not in demand during a certain season. On the other hand, cyclical unemployment is when there is less demand for goods and services in the marker so the supply needs to be reduced. There is myriad number of social and economic problems related with unemployment. The reason why government stresses much on reducing the unemployment levels is because it poses a great cost on an economy. In case of unemployed people themselves, they will receive less or no income based on whether or not they receive unemployment benefits from the government. Reduction in income means less spending and therefore lower standard of living. The cost of unemployment worsens the longer a person is unemployed because it affects as he becomes
Stimulating an economy in recession
Ranamae Zamora Economics Assignment: Stimulating an economy in recession March 27, 2007 . How might a government attempt to stimulate an economy which is in recession? Recession occurs when the economy experiences two consecutive quarters of falling Gross Domestic Product (GDP). GDP is the accounted money value of the goods and services produced in an economy. Recession shows how economic activity slows down and falls over a period in time. The decrease in GDP is shown in figure I where the real GDP trend goes below the potential real GDP. During this period there is rising unemployment, decreased output, decreased consumption and interest rates, and deflation (decrease in price level). A decrease in the components of aggregate demand (AD) such as consumption, investment and government spending as well as an increase in the components of aggregate supply (AS) such as the price of labor and price of inputs would be some of the causes of recession. So to stimulate an economy during this period the government can cause a change in the components of aggregate demand and aggregate supply. The government may use expansionary fiscal policies that influence the AD curve by decreased taxation and increased government spending. A decrease in tax would increase consumption because of an increase in disposable income and would therefore increase AD. This is shown in figure II as a
Discuss the benefits of economic growth
Discuss the benefits of economic growth Economic growth is simply, in the short run, the rise in real GDP due to rise in aggregate demand: and in the long run an increase in productive capacity (the maximum output that the economy can produce), meaning that the Factors of Production are either more efficiently used or more are discovered or found. Governments tend to try and achieve economic growth as it has many advantages, one of which is higher employment levels, which incidentally should lead to a decrease in unemployment. If more people who are willing and able to work in a country have a job (and therefore earning an income) the GDP of that country will inevitably increase and so if this high employment rate is stable and sustainable, economic growth, in the long run, will occur. Hence, employment figures could be seen as proportional to the GDP of a country. The employed workers are a Factor of Production called the labour force. If there is unemployment, then our Factors of Production are not being used as efficiently as possible and so the point on the Production Possibility Frontier will not be on the frontier itself, indicating that economic growth is not occurring as the productive capacity will not be increasing. However, if low levels of unemployment are sustained consistently, then you are using at least one Factor of Production to its full extent and so the
'The trade deficit on goods in the first three months of the year was £7.1bn.' Explain the meaning of this statement.
Bernice Berschader 'The trade deficit on goods in the first three months of the year was £7.1bn.' (a) Explain the meaning of this statement. The above statements states that between January and March 1999 the UK lost £7.1 billion on trade, as a result of a trade deficit or current account deficit on the Balance of Payments. A Current Account deficit is where imports into a country exceed exports. This leads to a disequilibrium of injections and withdrawals. Withdrawals from the circular flow of income exceed injections into the circular flow of income. Though the current account consists of 4 elements, visible goods, invisible services, net income and investment income, the statement above discusses the deficit of an element of the current account, the visible goods element Even though a current account deficit results in the value of imported goods exceeds the value of exported goods, the demands for exports and imports will not be affected in the short run due to the Martial Lerner Conditions. Though eventually this will result in the foreign currency price of UK exports to decline, it will take some time for countries to react to these changes. In the short run the volume of exports will remain the same before it increases as a result of devaluation in the long run. This is illustrated by the J-Curve effect below. (b) Examine the possible causes of
What are the current targets of macroeconomic policy in the UK and how can they be achieved?
Question 2 What are the current targets of macroeconomic policy in the UK and how can they be achieved? The United Kingdom is a highly developed country; it's the fifth largest economy in the world, and the third most populous country in Europe with a population of over 60 million people. The UK has a very sound macroeconomics system with four main objectives which helps sustain its status as a G8 member. The macroeconomic policy in the UK is influenced by two set of forces, the market by looking at supply and demand and those induced by government intervention. As a whole macroeconomic objectives in the UK are concerned with the overall performance of the economy. It relates to high economic growth, relatively stable price level and low and stable level of unemployment in addition the last goal is related to the balance of payments and the exchange rate may be distinguished, but it has no immediate or lasting advantage to the country of its payment position. I will deal with each goal in turn. Economic growth is a desirable objective, it's the major cause of rising living standards its has been a dominant forces for industrial nations over 200 years. Even small differences in growth rates can lead to large differences in income per head due to the power of compound interest. Since the end of the 2nd world war the rate if economic growth has averaged 21/2 % per annum. The
What are the effects of inflation on an economy?
What are the effects of inflation on an economy? Inflation can be defined as a sustained rise in general price levels. This is a very general definition as there are so many factors that have to be taken into account when considering the General price level of an entire economy. In the UK, inflation figures published and announced once a month give certain percentage rates of inflation. These are annual percentage rates indicating the change in inflation between the current year and the previous of the same month. The Retail Price Index (RPI) is the most famous, but the government prefers to quote the RPIX. Although other measures are used for calculating inflation, these are the most widely used methods in the UK. The RPI is a set of numbers that show the monthly change in the average of a sample of goods and services. There is an annual family expenditure survey that is used to decide which services are to be used in the sample and which are most important of those. In this sample typical household expenditure such as, food and housing costs would be considered whereas tobacco would not. Therefore, The inflation figures that form the RPI is the annual percentage change in this index from the most recent month compared with the same month in the previous year. This is known as the headline rate of inflation. Alternatively the government will regularly publish the
