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Cards In This Set
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Explain why it is important to have an accurate measure of inflation
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Inflation is a sustained rise in the general price level. Inflation statistics form the basis of government policy, affect firms’ and individuals’ planning and are used to set index linked wages, welfare benefits and interest rates. They are a means by which the success of current policy can be judged and are of interest to citizens, investors, trade unions, andofficial bodies. Inflation is a central economic target. If the statistics are inaccurate the direction and level of action may be inappropriate and may worsen the position. Lack of trustof the statistics may undermine the acceptance of policies and their effectiveness. Errors may be made in planning and real values may not be maintained.Understanding of inflation and recognition of the uses of a measure 4 marksExplanation of the need for accuracy/problems of inaccuracy 4 marks
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Discuss the methods and problems involved in constructing an accurate measure of the rate
of inflation. |
Inflation is measured by a weighted price index. This may be the consumer price index, the retail price index or a variation of these. Each of the stages of construction has problems. Choosing the base year needs a year with ‘normal’ conditions. The selection of a basket of goods needs to reflect average consumption patterns and allow for the introduction of new products. Weighting the individual contents has to reflect up to date spending patterns. Sampling sales outlets must cover a wide enough range of types and locations. Even if these are achieved the average picture may not accurately reflect the position of groups e.g. pensioners; it may not reflect changes in quality of goods; it may lag behind events and it may be based on inaccurate statistics and invalid sampling. International conventions set standards for participating countries.
Understanding of the means of measurement of inflation4 marks Discussion of the method of construction 4 marks Discussion of problems of stages and final outcome 4 marks |
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Explain why unanticipated inflation is often considered more of a problem than anticipated
inflation. |
Causes of inflation are classified as monetary, cost-push and demand-pull. These can each be affected by domestic and international influences and their importance will depend upon the nature of the individual economy. Monetary will usually be from government creation of money and easy credit although money supply is also affected by international flows of finance. Cost-push may be from domestic wage rates and imported raw materials. Demand pull may be from domestic demand from consumer and government spending or from demand for exports. An open economy with strong trade links is likely to be more affected by international pressures than a closed economy, as may economies lacking resources and facing a falling exchange rate.
Understanding of the types of inflation 4 marks Discussion of domestic influences 4 marks Discussion of international influences 4 marks |
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Explain the relevance of the Marshall-Lerner condition and the J-curve effect to the
success of a currency devaluation. |
Devaluation is government lowering the value of a currency from one fixed level to another. The J- curve effect shows that there is a time lag between introducing the policy and it having the desired effect. This may be the result of short-term elasticities and contractual obligations. The Marshall-Lerner condition requires a combined elasticity of demand for imports and exports greater than one. If this is not the case devaluation will not necessarily correct a deficit and may worsen the position.
Understanding of devaluation 2 marks Explanation of J-curve effect 3 marks Explanation of Marshall-Lerner condition 3marks |
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Explain how a country’s production possibility curve depends upon its factors of production.
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A production possibility curve (ppc) shows the combination of outputs that a country can produce when fully employing its resources. Factors include land, labour, capital and enterprise. Some countries have greater quantities and better quality of factors. Land may include a favourable climate and valuable minerals, labour may be skilled,, capital may embody modern technology and, enterprise may be readily available. The way the factors are combined to work productively will determine the quantities of different outputs produced. This will be reflected in the absolute and relative levels of output, which may be shown as diagrams.Understanding of the ppc and factors of production 4 marksExplanation of the different impact of the factors 4 marks
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