Definition of Inflation
Inflation is a general and continuous increase in the prices of goods and services in a country over a long period (usually a year). When the general price level rises, fewer goods and services are purchased per monetary unit. In other words, inflation reflects a decrease in the purchasing power of money: What is inflation in economics the loss of the real value of the internal medium of exchange and economic units of measure. To measure inflation growth, an indicator that reflects the percentage growth of a weighted “bundle of goods” was used. The measure of inflation is the Consumer Price Index (CPI).
Classification of inflation by its magnitude
Inflation is generally divided into different categories based on the size of the increase:
Moderate Inflation: Moderate inflation occurs when prices rise slowly. When the price is relatively stable, people trust it and deposit their money into a bank account. Whether it is a checking account or a low interest savings account as this allows them to earn money within a month or a year. People, for their part, are willing to put their money into long-term contracts because they do not believe that the price level deviates enough from the value of the asset that they can buy or sell.
Hyperinflation: Hyperinflation occurs when prices rise in double or triple digits by 30%, 120%, or 240% in an average year. When hyperinflation sets in, dramatic economic changes can occur. Often, in contracts, it may be linked to a price index, or it may be linked to a foreign currency, such as the US dollar. Because money quickly loses its value, people try not to get more than they need. That is, they are durable enough to keep their family members afloat. inflation in the economy
Hyperinflation: Abnormal inflation where the price index rises by 50% per month or at an annual rate of approximately 13,000%. This type of inflation indicates that a country is going through a serious economic crisis; When a currency loses value, purchasing power (the ability to use the currency to buy goods and services) decreases rapidly, and people try to spend money before the currency loses its value completely, when hyperinflation occurs days or even daily increases in wages become critical. This type of inflation usually occurs because the government finances its expenditures by issuing inorganic funds without any control or because there is no good system to regulate the country’s income and expenditure.
Causes of Inflation
There are three types of inflation:
Inflation caused by consumption or demand. This inflation follows the law of supply and demand. If the demand for a good exceeds the ability to produce or import it, prices tend to rise.
Cost inflation. This inflation occurs when the price of commodities (copper, oil, energy, etc.) rises, causing producers to raise prices to maintain their profit margins.
so swelled. This type of inflation occurs when strong price increases are expected in the future, and then they begin to adjust in advance so that the increase occurs gradually.Inflation caused by inflationary expectations (a vicious circle). This is typical in countries with high inflation, where workers demand higher wages to offset the effects of inflation, driving up prices for employers, creating a vicious cycle of inflation.
How does inflation stop?
To curb inflation, central banks tend to raise interest rates on public debt. As a result, interest rates on consumer loans (credit cards, mortgages, etc.) will rise.What is inflation in economics Demand for the product declined as consumer interest rates rose.
The downside of this control is that by reducing the demand for products, the industries that produce those products are inhibited, which can lead to economic stagnation and job losses.
Inflation is a general increase in the price level in an economy, and it is measured as a percentage of the change in those prices.What is inflation in economics Although the CPI and GDP deflator tend to show similar results, there are important differences between the two indicators that can lead to different measures. First, it reflects a different set of products and services, and second, it weighs the price differently. inflation in the economy
How to measure inflation
Consumer Price IndexThe Consumer Price Index is a measure of the average change in the prices of goods and services in an economy over a given period. Its goal is to measure the cost of living and show how inflation affects individual consumers.
Using the CPI to calculate inflation follows four steps:
1) Fixed shopping cart
The CPI curve represents the goods and services purchased for consumption by a particular group of people. For example, in Spain, this basket contains more than 479 items, divided into 12 main groups: food and non-alcoholic beverages, transportation, housing, HORECA (hotels, restaurants and cafeterias), recreation and culture, clothing and shoes, kitchen equipment, medicine, communications and alcoholic beverages Tobacco and education. Finally, there is a section called “Other” that includes products not included in the previous group. inflation in the economy
2) Calculate the price of the basket
Once the curve has been determined, the next step in calculating the CPI is to find out the current and past prices of all goods and services. Prices are collected from various sources such as retailers, supermarkets, convenience stores, and home improvement stores. Another set of rates are also collected from authorities, energy providers, and real estate agents.
3) Calculation of the indicator
CPI is an indicator, so we then need to specify the base year. The base year is used as a benchmark for comparing certain years with other years. The index is then calculated by dividing the price of the basket of goods and services in a given year by the price of the same basket in the base year. This ratio is multiplied by 100 which is the consumer price index. Base year CPI always equals 100. Inflation in the economy bully anniversary edition apk download
4) the final calculation of inflation
Finally, once we have the CPI, we can calculate inflation. Specifically, the inflation rate is the percentage change in an indicator from one period to the next. To calculate it we can use the following formula:
Inflation rate = [(CPI year 1 – CPI year 0) / CPI year 0] * 100%
The GDP deflator is a measure of the price level of all final goods and services that an economy produces internally. It can be calculated as the ratio of nominal GDP to real GDP multiplied by 100. This formula shows that changes in nominal GDP cannot be attributed to changes in real GDP.What is inflation in economics
GDP deflator = ([Nominal GDP / Real GDP] * 100)
In other words, the GDP deflator measures the ratio between nominal GDP (total output measured at current prices) and real GDP lathse(total output measured at constant base prices). Therefore, it reflects the current price level compared to the base year price level. economics topics
Calculating inflation using the deflator follows four steps: Inflation in the economy
1) Calculate the nominal GDP
Nominal GDP is defined as the monetary value of all goods and services produced in an economy at current prices. So this part is easy. All we have to do is multiply the quantities of all goods and services produced at their own prices and add them together.
2) Calculating real GDP
In the second step, we calculate the real GDP. Unlike nominal GDP, real GDP shows the monetary value of all goods and services manufactured in an economy at constant prices. This means that we choose a base year and use the prices from that year to calculate the value of all goods and services in all other years. What is inflation in economics This allows us to eliminate the effects of inflation.
3) Deflation Calculation:
Now that we know the nominal GDP and the real GDP, we can calculate the GDP deflator. To do this, we divide the nominal GDP by the real GDP and multiply the result by 100. This gives a change in nominal GDP that cannot be attributed to a change in real GDP.What is inflation in economics
That is, the increase in GDP results from an increase in prices and not an increase in the quantity of goods and services.
4) the final calculation of inflation
The base year deflator will always be 100 because nominal GDP and real GDP will coincide. But as of the base year, the value tends to change. To calculate the inflation rate, we simply calculate the percentage difference between two years. inflation in the economy Inflation = [(deflat%ion year 1 – deflation year 0) / deflation year 0] * 100