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Meaning and Measurement of Inflation





Inflation is a situation in which a decline in the purchasing power of money results in a rise of the general price level. Its opposite is deflation. Prices in some markets (e.g. pocket calculators) can fall even in times of inflation, and prices in some markets (e.g. medical care) rise even in times of deflation. But it is not the change in individual prices that determines the extent to which an economy is experiencing inflation or deflation. It is the upward or downward movement in the average prices of all goods and services combined that determines the extent of inflation or deflation. In other words, inflation is an increase in the overall average level of prices and not an increase in the price of any specific product. An extreme form of inflation is known as hyperinflation. Hyperinflation is an extremely rapid rise in the general price level. There is no consensus on when a particular rate of inflation becomes "hyper."

The boundary between inflation and deflation is price stability. Price stability occurs when the average level of prices is moving neither up nor down. The average level of prices is called the price level and is measured by a price index. A price index measures the average level of prices in one period as a percentage of their average level in an earlier period called the base period.

The inflation rate and the price level. The inflation rate is the percentage change in the price level.

The most widely reported measure of inflation is the consumer price index (CPI) which measures changes in the average prices of consumer goods and services. The CPI is sometimes called the cost-of-living index. It includes only consumer goods and services in order to determine how rising prices affect the income of consumers. Unlike the GDP chain price index, the CPI does not consider items purchased by businesses, and government.

As the price level rises during an inflation, the same sum of money (a dollar, a ruble) buys fewer goods and services than before. Hence, inflation reduces the money real purchasing power. As the price level falls during deflation, a dollar (a ruble) buys more goods and services than before. Hence, deflation increases the money real purchasing power.



Because money is used as a unit of account and as a medium of exchange in most economies, changes in the purchasing power of money generally have several (sometimes adverse) consequences.

Inflation hurts people living on fixed money incomes and people who have saved fixed amounts of money for specific purposes such as financing their children's education or their own retirement. Inflation hurts people who have loaned out money at a rate of interest that did not include an allowance for an increase in the average price level. So lenders are without protection against a decline in the purchasing power of the loan when it is repaid.

The adverse effects of inflation depend on the extent to which inflation is correctly anticipated and the extent to which it is unanticipated. If inflation is correctly anticipated, contracts can be negotiated to include “inflation premiums”. Such premiums are designed to protect lenders and other recipients of future money payments from declines in the purchasing power of the money to be repaid to them. Lenders, for example, will insist on higher interest rates if they anticipate inflation; and the greater the inflation they anticipate, the higher the rate of interest they will ask. Borrowers who agree to the lender's terms presumably share similar anticipations of inflation.

However, it is often difficult to correctly anticipate a future rate of inflation.

Inflation is a phenomenon experienced in all countries. But inflation rates vary from one country to another. When inflation rates differ by a lot and over a prolonged period of time, the result is a change in the foreign exchange value of money.



Vocabulary Focus

 

Ex. 1. Study the meaning of the following easily confused words and do the exercises that follow.

Successive/successful

successive– последовательный;

successful успешный.

Fill in the blanks with the proper word.

1. The inflation can be curbed only by a number of... reforms.

2. His ... career was due to his tremendous efforts and aptitude.

3. The sales were profitable only because of the ... marketing campaign.

4. The measures lead to … changes.

Ex. 2.Find the words or expressions in the text which mean the following.

1. to rise;

2. to lend;

3. to cause sth to happen;

4. to make sth smaller in size, quantity and price;

5. to have a bad effect on sth, to cause distress;

6. to see what is going to happen;

7. to change, esp according to some factor;

8. to confer with another person to reach agreement.

 

Words for references: to move upward; to negotiate; to vary; lo loan out; to hurt; to result; to anticipate; to reduce.

 

Ex. 3. Using a dictionary, add as many words as possible into the table and suggest some common word partnerships with them.

Noun Adjective/Adverb Verb
  persistently  
  purchasing  
allowance    
recipient    
    determine
    measure
    reduce
    anticipate
    negotiate
    vary

Ex. 4. Complete the sentences with the words given bellow.

1. An … form of inflation is known as hyperinflation.

2. The … between inflation and deflation is price stability.

3. The … level of prices is called the price level and is measured by a price index.

4. A common price index is called the … Price Index, or simply CPI.

5. Inflation reduces the money real … power.

6. If inflation is correctly anticipated, contracts can be negotiated to include “inflation … “.

7. It is often difficult to correctly anticipate a future … of inflation.

 

Words for references: boundary, consumer, extreme, average, purchasing, premiums, rate.

 

Ex. 5. Match the Russian word-combinations in A with their English equivalents in B.

A B
1) стабильность цен a) a general price level
2) движение вверх и вниз b) a price stability
3) индекс потребительских цен c) a price index
4) реальная покупательская способность денег d) a consumer price index
5) инфляционная надбавка e) inflation premiums
6) понижение покупательской способности f) a decline in the purchasing power
7) ожидать инфляцию g) the upward and downward movement
8) общий ценовой уровень h) money real purchasing power
9) индекс цен i) to anticipate inflation
10) неблагоприятный эффект j) adverse effect

 



Ex. 6. Match the words in A with their definitions in В.

A B
1) inflation 2) deflation 3) disinflation 4) hyperinflation   5) exchange   6) level 7) price 8) boundary     9) premium   10) borrower 11) lender 12) consequence 13) allowance   14) base year a) usual or normal position b) the amount of money etc. asked or given for something c) amount of sth, esp. money allowed or given regularly d) reaction or an instance of giving one thing or person of the same type or of equal value in return for another e) a person taking or receiving (something) with the understanding that he will return it f) person making a loan g) a logical result or conclusion h) a rise in prices and wages caused by an increase in the money supply and demand for goods and resulting in a fall in the value of money i) a reward or prize, an amount paid in addition to the regular change j) a limit or a border k) a situation in which very large and rapid price rises occur l) a reduction in the rate of inflation. m) the reduction of the amount of money being used in a country, in order to lower prices or keep them steady n) a year chosen as a reference point

 

Comprehension

 

Ex. 1.Chose the correct answer.

1. Inflation is:

a. an increase in the general price level.

b. not a concern during war.

c. a result of high unemployment.

d. an increase in the relative price level.

2. Inflation is measured by an increase in:

a. homes, autos and basic resources.

b. prices of all products in the economy.

c. the consumer price index.

d. none of the above.

3. The consumer price index (CPI):

a. adjusts for changes in product quality.

b. includes separate market baskets of goods and services for both base and current years.

c. includes only goods and services bought by the typical consumer.

d. uses current year quantities of goods and services.

4. Deflation is a (an)

a. increase in most prices.

b. decrease in the general price level.

c. situation that has never occurred in U.S. history.

d decrease in the inflation rate.

5. Suppose a typical automobile tire cost $50 in the base year and had a useful life of 40,000 miles. Ten years later, the typical automobile tire cost $75 and had a useful life of 75,000 miles. If no adjustment is made for mileage, the CPI would:

a. underestimate inflation between the two years.

b. overestimate inflation between the two years.

c. accurately measure inflation between the two years.

d. not measure inflation in this case.

Ex. 2.Say whether the following is true or false.

1. Inflation occurs when there is an increase in the purchasing power of money.

2. Unlike the GDP deflator, the CPI does not consider goods and services purchased by business and government.

3. Disinflation and deflation mean a decrease in the average price level.

4. A consumer price index of 110 for a given year indicates that prices in that year are 10 per cent higher than prices in the base year.

5. People with fixed income tend to fare best in an inflationary period.

 

Ex. 3.Use the text to answer the questions:

1. Do prices in the times of inflation rise in all markets equally?

2. What is the boundary between inflation and deflation?

3. What is the price level and what is it measured by?

4. How do they define the inflation rate?

5. What do they call the situation when the money real purchasing power increases?

6. What category of people is most heavily hurt by inflation?

7. What measures can be taken to protect lenders from inflation?

8. After World War II, a 12-ounce bottle of Pepsi sold for 5 cents. Nowadays, a 12-ounce can of Pepsi sells for more than 10 times that much. Can this serve as an example of inflation?

9. Consider this statement: “When the price of a good or service rises, the inflation rate rises”. Do you agree or disagree? Explain.

Text 2

While reading the text pay attention to the difference between demand-pull inflation and cost-push inflation.

 








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