2. 2

4. OBJECTIVES 4 At the end of the lesson students should be able to: (i)Define the term inflation (ii)Appreciate how the RPI is calculated. (iii)Explain how inflation is calculated (iv)Discuss and evaluate the consequences of inflation.

5. INFLATION Definition & Main Consequences on the Economy

6. What is Inflation? There are several definitions of inflation :  A situation whereby there is too much money and too few goods.  A situation whereby the general price level is rising.  A situation whereby the value of money is falling.

7. INFLATION DEFINED  Inflation is a situation where there is a sustained and persistent increase in the general or average level of prices.  Hyperinflation – very high inflation persistent downward movement in the average level of prices.  Deflation - persistent downward movement in the average level of prices.

8. THE EVIDENCE Retail Prices of Selected Food Commodities ItemBrandUnitDec -04Dec -05Dec- 06Aug-07 RICELotus2 kg.$13.79 FLOURLotus All Purpose2 kg.$9.19$6.99 OILLotus Soyabean Oil1 1itre$12.49$14.49$12.99$12.79 PASTACuisine Macaroni400 g.$2.79 $3.29 COFFEENescafe100 g.$14.39$16.99 $19.99 TEALipton (‘50s)50 Ct.$11.49$13.49$15.29 MILKNestle Full Cream1 litre$6.69$7.19$8.25 EGGSClear Box - Largedozen$8.69 $9.49$9.99 BUTTER/ MARGARINE Blue Band240 g.$3.39$3.59$3.75 SUGARCaroni Granulated1.8 kg.$10.69 $11.69 CHEESEAnchor Cheddar250 g.$10.49$12.89$13.99 Source: Hilo Food Stores

9. THE EVIDENCE Retail Prices of Selected Food Commodities Source: Hilo Food Stores ItemBrandUnitDec -04Dec -05Dec- 06Aug- 07 CHICKEN Arawak Family Pack Kg.n.a.$20.25$22.99 FISH Carite Kg.$32.99 JUICES Orchard Orange Drink 1 litre$6.99$7.99$8.29$8.99 SOFT DRINKS Coca Cola Contour 2 litre$6.49$6.99 $6.69 BABY FOODS Gerber 6 oz.$6.49 $7.79 PEAS Cuisine Peas & Carrots 426 g.$3.99$4.19$4.99 VEGETABLESOnionsKg.$4.39$4.99$6.99$8.99 PotatoesLb.n.a.$5.49 Carrots (Pre – packed)Lb.$5.29 $5.99$6.99 Garlic (Pre - packed)200 g.$2.79$3.49$3.99 FRUITBananasKg.n.A$9.99

10. MORE EVIDENCE Our School Canteen: A Comparison of Prices ITEM2013201020082005 ROTI$15.00$10.00$7.00$5.00 PIES$5.00$4.00$3.00$2.00 SANDWICHES$2.00 $1.50$0.75 BURGERS$10.00 $7.00$5.00 WATER (SMALL)$3.00$2.00 WATER (LARGE)$5.00$4.00 $3.00 MINTS & SWEETS2 FOR $13 FOR $14 FOR $1 CHIPS$3.00$2.00$1.50$1.00 CHOCOLATE$4.00 $2.50$2.00 JUICE (FRUTA)$6.00$4.00$3.00$2.50 Source: Signal Hill Secondary School Canteen 1

11. THE CONSEQUENCES OR EFFECTS OF INFLATION

14. The Major Consequence of Inflation Inflation causes an erosion in the purchasing power or real value of money resulting in an reduction in the quantity of goods or services it can purchases. Inflation therefore affects the functions of money greatly. (See Table 33-3 of text) 14

15. An Overview of the Consequences of Inflation Inflation can be looked at in the context of the following factors: –Consumption –Balance of Payments –Investments –Unemployment –The Demand for money –Income Distribution –Savings and Growth (See Text Pgs. 504 to 506) 15

16. THE CONSEQUENCES OF INFLATION ON AN ECONOMY RR eduction in purchasing power of individuals. RR educed standard of living. II nequalities in the distribution of wealth. EE rosion of the value of money saved. PP ossible increase in production and unemployment II ncreased demand for higher wages. II ncreased in imports if goods are cheaper.

17. THE CONSEQUENCES OF INFLATION ON AN ECONOMY Creation of uncertainty about future prices in the investment sector. Adverse effects in a country’s current account of the balance of payments which may cause deficits