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Inflation (1)

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Алимжан Разиев
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3 views

Inflation (1)

Uploaded by

Алимжан Разиев
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 13

INFLATION

• Inflation is a sustained rise in the general price


level in an economy over time.
• This does not mean that the price of every
good and service increases, but that on
average the prices are rising.
DEGREES OF INFLATION

• creeping inflation – a low and stable rate


of inflation (2%)
• hyperinflation – an exceptionally high rate
of inflation, which may result in people losing
confidence in the currency ( more 50%)
HOW TO MEASURE
INFLATION?
Measure 1
Consumer price Index
CPI measures price changes of a representative basket
of goods and services (those consumed by an average
household) in the country. For example, items such as
staple food products, clothing, petrol and
transportation are likely to be included.
Measure 2
Retail price Index
RPI is used to calculate the rate of inflation . Unlike the
CPl, the RPI includes the cost of housing, such as
mortgage interest payments and other housing costs,
but excludes low-income pensioners and high-income
households.
Difference between CPI and
RPI
CPI
RPI
• RPI includes the cost of
• The CPI includes costs paid
housing, such as mortgage
for financial services
interest payments and other
• Both price indices try to housing costs
measure changes in the
• RPI excludes low-income
cost of living for the
pensioner households and
average household.
very high-income households
• The CPI is calculated using
• The RPI is calculated using
the geometric mean
the arithmetic mean
• Ex: 3 pizzas prices with
• Ex: 3 pizzas prices with
geometric mean
arithmetic mean (1+2+3) /
CALCULATING
INFLATION BY
THE CPI
BASKET OF GOODS

• A basket of goods refers to a fixed set of consumer products and


services valued on an annual basis.
• It includes basic food and beverages such as cereal, milk, and
coffee. It also includes housing costs, bedroom furniture, apparel,
transportation expenses, medical care costs, recreational
expenses, toys, and the cost of admissions to museums also
qualify, Education and communication etc.
• Basket of goods are consisted 369 goods and services in
Kyrgyzstan( National Statistic Committee, 2011)
Note: in case for CPI the
prices were calculated
as an geometric mean
in case for RPI –
arithmetic mean
Product Price in 2013 ($) Price in 2014 ($)
Pizza 9 10
Cinema ticket 10 11
Petrol 13 3,5
Total Basket of 22 24,5
goods

Assume 2012 is the base year, when the total basket


price was $20
ANSWER?

2013: $20 / $24,5 X 100 = 110 (prices in 2013 were


10 per cent higher on average than in 2012)
2014: $24,5 / $20 X 100 = 122.5 (prices in 2014
were 22.5 per cent higher on average than in 2012)
The inflation rate between 2013 and 2014 is the
percentage change in the price indices during these
two periods?
%
WEIGHTED INDEX
• The products measured in the CPI are of different degrees of
importance to the typical household, so weights are applied to
reflect this.
• To create a weighted price index, economists multiply the price
index for each item (in the representative basket of goods and
services) by the statistical weight for each item of expenditure
• Weighted price index is more accurate in measuring changes in
the cost of living
food consumption accounts
for 40 per cent of average
household
spending

Without using weights, the average price index


would be 116.18 =

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