Category: Economics for Business: Ch 26
The principal measure of inflation, the consumer prices index, is calculated from price changes in a basket of goods. The composition of this basket is changed each year to reflect changes in consumer spending patterns. 2008 sees smoothies, USB storage devices and muffins coming into the basket, while ready meals and 35mm camera film have had their day and leave the basket of goods.
What’s in and what’s out in 2008 Guardian (17/3/08)
Fruit smoothies in, ready meals out Guardian (17/3/08)
Smoothie pour into cost of living basket Guardian (17/3/08)
Let them eat sourdough bread, olives and sun-dried tomatoes Guardian (17/3/08)
Smoothies join basket of goods used to calculate inflation Times Online (18/3/08)
Questions
| 1. |
Explain what is meant by a weighted index. Why does the consumer prices index (CPI) need to be a weighted index? |
| 2. |
Explain how the CPI is calculated. |
| 3. |
Discuss why annual percentage changes in the CPI may not be an appropriate measure of inflation for all groups in society. |
Rapid economic growth in China has pushed inflation to an 11-year high of 8.7% in February 2008. This was driven significantly by higher food prices, with the price of pork rising by nearly 64%. This higher level of inflation has led to concerns that policy may need to be tightened.
Sweet and sour pork The Economist (13/3/08)
China inflation hits fresh high BBC News Online (11/3/08)
Chinese inflation alarms authorities Guardian (11/3/08)
Chinese warn on decade-high inflation Times Online (5/3/08)
Chinese inflation shoots to 11-year high Times Online (11/3/07)
China tries to apply brakes to economy Guardian (4/3/08)
Questions
| 1. |
What are the main causes of rising inflation in China? |
| 2. |
Assess the extent to which policy needs to be tightened to counter the rising level of inflation in China. What would be the possible downsides of such a policy? |
| 3. |
Discuss possible policy changes that could be implemented by the Chinese government to reduce the level of inflation. |
GDP is quite a good measure of a nation’s production of goods and services, but it doesn’t include many other factors relating to the standard of living in an economy and for this reason, various other measures of living standards have been developed. However, there is also another issue with GDP and that relates to how best to measure a country’s economic performance. Should we use GDP per head or GDP growth? Population changes can significantly distort economic welfare and so do need to be taken into account. The article below from The Economist looks at these issues in depth and considers the best way to measure economic performance.
Grossly distorted picture The Economist (13/3/08)
Questions
| 1. |
Explain how GDP per head can fall while economic growth is rising. |
| 2. |
Explain why the use of GDP per head as a measure of economic performance may lead to the definition of recession being flawed. |
| 3. |
Assess the principal factors that result in economic growth and GDP per head rising together. |
China’s rate of inflation has hit an 11-year high, partly due to the cold winter weather destroying crops and pushing up food prices. However, inflationary pressure has been growing for some time with rapid economic growth and the resultant pressure on resources. This is despite six increases in interest rates in the past thirteen months.
Families feel pinch as inflation threatens economic miracle Guardian (25/2/08)
Chinese inflation soars to an 11-year high Times Online (20/2/08)
Chinese inflation hits 11 year high Times Online (19/2/08)
Questions
| 1. |
Explain the principal factors that have led to the increase in inflation in China. |
| 2. |
“Policymakers in China will likely try to tighten monetary policy further, with more reserve requirement ratio hikes, faster Chinese yuan appreciation, and more heavy handed controls over bank lending.” Discuss the likely effectiveness of these policy measures. |
| 3. |
Assess the extent to which changes in food prices will affect the overall level of aggregate demand in the Chinese economy. |
Concerns have been growing that the UK faces a downturn in economic growth during 2008. The articles below consider this possibility. With a credit crunch taking place and manufacturing output falling, the concerns for a recession may well not prove unfounded.
Is this the big one? Guardian (3/1/08)
Your survival plan if a recession strikes Times Online (5/1/08)
Top of the flops – 10 pointers to a downturn in 2008 Guardian (6/1/08)
Recession fears as manufacturing drops Times Online (11/1/08)
Crash that ‘won’t happen here’ looms large Guardian (3/12/07)
Questions
| 1. |
What are the key indicators of an impending recession? |
| 2. |
Assess the likelihood of a recession in the UK in 2008. |
| 3. |
What policies could the UK government adopt to avoid a recession during 2008. What would determine the success of such policies? |