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Learning unit 9
Inflation
Remember, the
best way to learn
is to take notes
and ASK if you
dont understand.
Content
In this learning unit you will learn
more about:
The definition of inflation
Measurements of inflation
Effects of inflation
Causes of inflation
Conflict approach to inflation
Read section
20.1 in
textbook
pp 382
Read section
20.2 in
textbook
pp 382-384
9.2 Measurement
of inflation
9.2 CPI
Recap from learning unit 5 page 246 of
textbook - how CPI is measured.
StatSA regularly publishes the following
table on the CPI:
You have to be able to use the information
on this table to calculate inflation rates on
a:
month-on-month basis
annual average on annual average
Month-on-month:
To calculate the inflation rate from one
month in the one year to the next year, look
at the following example: What is the
inflation rate from July 2012 to July 2013?
answer.
range of the
SARB.
9.2 PPI
The production price index places more focus on measuring
the price of producing (cost of production) rather than
consuming, like the CPI does (cost of living).
The PPI includes intermediary goods but excludes services.
Goods like food are more important in the CPI than in the PPI.
PPI records the first goods at the first significant commercial
transaction, for example imports are measured when they
enter the country, not when they are sold (like in the CPI).
Due to the differentiation made between imports and other
goods, the effect of the rand depreciation and appreciation
can also be seen on the PPI.
PPI can be seen as a warning sign as what will soon happen
to the CPI.
GDP at
current
prices
GDP at
constant
prices
2012
3 262 545
2 899 248
2013
3 534 327
2 963 389
2014
3 796 460
3 008 576
Year
Year
2013
GDP at
current
prices
GDP at
constant
prices
3 534 327
2 963 389
3 796 460
3 008 576
Read section
20.3 in
textbook
pp 384-388
Distribution effects:
Inflation causes winners and losers in the economy.
If you borrow R10 000 from me and promise to pay
me back in one year, with 5% interest rate, you will
pay R10 500 back. But if the inflation rate is 10%,
then the R10 500 will only be worth R9 450, as it
lost 10% of its value due to inflation. Therefore, I
lost money due to inflation and you won that
money.
Do you understand how the youth and the
government win from inflation? Ask your e-tutor if
you do not understand.
Only read
Demand-pull
and cost-push
inflation in
section 20.4 in
textbook
pp 388-389
P3
Price level
P2
P1
E2
E1
AD
Y1 Y2
Yf
Price level
P2
P1
E2
E1
AD
Y2 Y1
Total production, income
How much
people want to
produce
>
How much
people
Value of
want claims
The nominal
value received
by participants
has increased
but not the real
value.
=
>
How
much
people
want to
produce
Note that
production has
Value of production increases
not really
due to higher prices
increased it is
just the value
that has been
inflated due to
How
higher prices.
=
>
much
people
want to
produce
define inflation?
describe what the CPI, PPI and implicit GDP deflator are?
differentiate between the CPI and PPI?
define demand-pull inflation?
define cost-push inflation?
differentiate between nominal and real values?
explain why policy-makers regards inflation as a problem?
distinguish between the main types of costs of inflation?
describe what measures can be used to get rid of demand-pull
inflation or cost-push inflation?
explain with and without a diagram the difference between
demand-pull and cost-push inflation?
explain the impact of measures taken to get rid of demand-pull
and cost-push inflation?
calculate the inflation rate?
explain the conflict approach to inflation?
Good job!
Only two more
learning units
to go!