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Definition of Inflation
Inflation means a sustained increase in the aggregate or general price level in an economy.
“inflation means that your money won’t buy as much today as you could yesterday. ”
In the UK the rate of inflation has varied a lot from 25% a year in 1974 to deflation in the 1920s and 1930s.
Deflation is a fall in the price level of the economy.
- The model of free markets states the importance of the price mechanism for determining prices in an economy. When there are shortages firms raise their prices, and when there are surpluses prices fall.
- The price mechanism is important for relative prices but with inflation we are concerned with overall changes in the rate of inflation
Purchasing Power
If we have inflation then £100 is going to buy less in the future
Purchasing power of the pound (1920=100)
1920 |
1930 |
1940 |
1950 |
1960 |
1970 |
1980 |
1990 |
1998 |
100 |
125 |
129 |
98 |
66 |
46 |
133 |
6.8 |
5.33 |
This table shows us that £100 buys less goods in 1998 than 1920,( approx 78% of its value)
- Therefore another definition of inflation is a decline in the purchasing power of money.
The real value of money is the amount of goods it can buy
If you had a fixed income of £100 then the nominal value remains unchanged but the real value has fallen by 95 % in the last 78 years.
- The rate of change of the price level is known as the rate of inflation e.g. if the price level doubles then the rate of inflation is 100%
- If the rate of inflation falls (e.g. from 10% to 2%), prices are still rising but at a slower rate.
Hyper Inflation
hyper inflation is greater than 1000%. With hyper inflation money loses its value so rapidly that nobody wants to use it as a medium of exchange
In 1920s Germany had inflation of 100 billion %
In 1946 Hungary had inflation of 42,000 billion per cent
Essays and Revision Notes on Inflation
Hyperinflation - Causes and Costs
Inflation Essays
- Discuss the Difficulties of Controlling Inflation
- Does Devaluation Cause Inflation
- Should the Aim of the Government be to Attain Low Inflation?
- Explain What Can Cause a Sustained Increase in the Rate of Inflation
- Essay on Inflation - Is Inflation Harmful?