gcse economics - the big picture: inflation - introduction

This means an increase in the average price level over a year. e.g. on average prices may increase by 5% during 2001.

If prices increase by 5% it also means that money can buy 5% fewer goods than in the previous year. Therefore inflation leads to a fall in the buying power of money.

REAL INCOMES If you receive a pay rise of 10% but inflation is 5%. In real terms you are 5% better off.

HOW IS INFLATION CALCULATED?

The Retail Price Index surveys changes in the prices of goods and services.

In the above example prices have gone up by £0.75 or 7.5%

PROBLEMS OF INFLATION

• Prices increase therefore people may buy fewer goods, the economy may suffer

• People need to keep asking for pay increases to match price rises. This can cause problems at work

• If people are on fixed incomes e.g. pensioners or students. They will be worse off because they will be able to buy fewer goods

• The costs to businesses may increase. They may cutback on production.

• If the prices of UK goods increase too much then people and businesses may start to import more goods from abroad because they are cheaper. This will cause major problems for the economy.

ACTION

a. Think of 3 or 4 goods that you buy regularly. What inflation have you experienced i.e. how have the prices changed over recent years?
b. Which of the problems do you believe is the greatest a) to individuals b) to businesses c) to the economy