115 CFA
File: Economics - Reading 15 - 4. Inflation

4. Inflation

e. explain inflation, hyperinflation, disinflation, and deflation;

f. explain the construction of indices used to measure inflation;

g. compare inflation measures, including their uses and limitations;

h. distinguish between cost-push and demand-pull inflation;

What is the definition of inflation?
Inflation is a continuing rise in the general level of prices of goods and services. It can also be defined as a decline in the value (the purchasing power) of the monetary unit. There is too much money chasing too few goods.

What are the three types of inflation?
- Deflation - a decrease in the general price level of goods and services.
- Disinflation - slowing in the rate of increase in the general price level.
- Hyperinflation - indicates a very high and increasing rate of inflation.

What is the math equation for the annual inflation rate?
i = (this year's PI - last year's PI) / last year's PI
- PI = price index

What is the Laspeyres index method of calculating price index?
The Laspeyres index uses the same group of commodities purchased in the base period. It requires data from only the base period for a more meaningful comparison over time, but does not reflect changes in buying patterns over time.

What is the Paasche index method of calculating price index?
The Paasche index uses the current composition of the basket. It tends to understate inflation.

What is the Fisher index method of calculating price index?
The Fisher index is the geometric mean of the Laspeyres and Paasche indices.

What is cost-push inflation?
Cost-push inflation is a result of decreased aggregate supply as well as increased costs of production. It basically means that prices have been "pushed up" by increases in the costs of any of the production factors (money wage rate and money price of raw materials) when companies are already running at full production capacity. Increased costs are passed on to consumers, causing a rise in the general price level (inflation).

What is demand-pull inflation?
Demand-pull inflation occurs when total demand for goods and services exceeds total supply. Buyers, in essence, "bid prices up" and cause inflation. This excessive demand usually occurs in an expanding economy.

What is unit labor cost (ULC) and how is it calculated?
- The unit labor cost (ULC) indicator is calculated as total compensation per worker divided by total output per worker. Higher labor costs may pass through to prices.
- ULC = total compensation per worker / total output per worker

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