Measuring Inflation
Economics: IB Diploma, topic 2.3.6
Inflation
A modern economy has millions of goods and services whose prices are continually changing. To measure inflation, economists measure the change in price level of a representative 'basket' of goods and services.
Inflation
- Inflation is defined as a persistent increase in the general price level over a given period of time.
- Inflation figures are normally given on an annualized basis.
- The most common measure for inflation is CPI, the Consumer Price Index.
- This is calculated by measuring the change in the value of a basket of goods and services.
An economic indicator
- One reason inflation is an indicator of the strength of the economy is because high and unexpected inflation would mean goods and services are becoming unaffordable as the purchasing power of income falls.
The price of a basket of goods
- To calculate the price level, economists begin with the concept of a basket of goods and services, consisting of the different items individuals, businesses, or organizations typically buy.
- Economists then use a weighted average of these goods. This is because changes in the price of goods for which people spend a larger share of their incomes will matter more than changes in the prices of goods for which people spend a smaller share of their incomes.
Test yourself on Measuring Inflation
What is defined as the persistent increase in the general price level over a given period of time?
How do economists construct a basket of goods used to measure inflation?