Answer to Question #134273 in Macroeconomics for lesego

Question

Define the term, “inflation” and indicate the index that is used to measure the rate of inflation

Answer 1

Inflation in a sustained increase in the general level of prices of goods and services in the economy. It represents an increase in the cost of living of the general public due to a continuous increase in the general level of prices.

NB: High prices per se are not inflationary, but a persistent increase in the general price level.

There are three main methods used to measure inflation: The consumer price index (CPI), the retail price index (RPI), and the GDP deflator.

Consumer price index (CPI) - it is a price index that measures the changes in the cost of a weighted average market basket of goods and services that is purchased by consumers/households.

Retail price index (RPI) - it is a price index that measures changes in the cost of a representative sample of retail goods and services.

GDP Deflator - it is a measure of the average level of prices of all new and domestically produced final goods and services in an economy, during a given year. Changes of GDP deflator from year to year gives an impression about movement in general prices: inflation.