Definitions & Measurement (CIE IGCSE Economics)

• Inflation is the sustained increase in the general price level of goods/services in an economy
  • The general price level is measured by checking the prices of a 'basket' of goods/services that an average household will purchase each month
  • This basket of goods is turned into an index and it is called the consumer price index (CPI)
  • The UK has an inflation target of 2% per annum
    • Low inflation is better than no inflation as it is a sign of economic growth
      
      
• Deflation occurs when there is a fall in the general price level of goods/services in an economy
  
  • Deflation only occurs when the percentage change in prices falls below zero %

• Inflation is the sustained increase in the general price level of goods/services in an economy
  
  
• The inflation rate is the change in general price levels in a given time period
  • The inflation rate is calculated using an index with 100 as the base year
  • If the index is 100 in year 1 and 107 in year 2 then the inflation rate is 7%
    
    
• The consumer price index (CPI) is used to measure inflation

The Consumer Price Index (CPI)

• A 'household basket' of 700+ goods/services that an average family would purchase is compiled on an annual basis
  •  A household expenditure survey is conducted to determine what goes into the basket
  • Each year, some goods/services exit the basket & new ones are added
    
    
• Goods/services in the basket are weighted based on the proportion of household spending
  • E.g. More money is spent on food than shoes, so shoes have a lower weighting in the basket
    
    
• Each month, prices for these goods/services are gathered from hundreds of locations across the country
  • These prices are averaged out
    
    
• The price x the weighting determines the final value of the good/service in the basket
  • These final values are added together to determine the price of the 'basket'
    
    
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• The percentage difference in CPI between the two years is the inflation rate for the period
  
  

Step 1: Calculate the CPI for 2020

Step 2: Calculate the CPI for 2021

Step 3: Calculate the percentage difference between the CPI for 2021 and 2020