Inflation
In the economy the study of increases and decreases in general consumer goods or services prices is referred to as inflation and deflation - respectively. Economists studying inflation or deflation study either a sustained increase or decrease in the general price level over time. The study of such is important as the effect of price levels within society effect all participants in the economy including individuals, business and government.Inflation and deflation is measured by many sources in a variety of ways, depending on how the information is to be used and who by. In Australia, the Australian Bureau of Statistics in the form of the Consumer Price Index (CPI) measures inflation and deflation. The changes in the CPI reflect the levels of inflation or deflation, which in turn encapsulates the real cost of living. The CPI is measured by the use of a "basket of goods and services", all the goods and services are priced in one year and then again the following year, changes in prices can then be used to calculate inflation or deflation. In the "basket of goods and services" there is eight categories...
Real incomes fall because more of the income is spent on autonomous consumption - because of the decrease in purchasing power. Living standards similar to real incomes also relates closely with purchasing power. · Interest rates fall as inflation falls and interest rates rise as inflation rises. When there is inflation the purchasing power of the dollar inevitably decreases. Inflationary or deflationary expectations are when the participants in the economy cause or bring forward the effects of inflation or deflation due to their own expectations. As the title suggests imported inflation or deflation occurs when the prices of imported good or services increase or decrease. · Real incomes· Income distribution· Living standards· Wages· Unemployment· International competitiveness· Exchange rates· Interest ratesInflation causes real incomes to fall - if such is to occur it places an enormous burden on individuals, it is a burden on business and then it falls into the government's hands. If the costs of production rise, this results in an immediate rise in prices of the produced good or service (unless of course the business chooses to absorb the costs). So government's need to step in and limit the impact preferably by maintaining wage rates with inflation. If the economy is subject to inflation that means that prices of general goods and services within the marketplace are increased, this means that the value of the dollar is decreased, because more money is needed to buy the same products or services.
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