Answer to Question #176255 in Macroeconomics for Kofi Asare

Question

For this problem, refer to the CPI Newsletters attached to the questions.

a) Explain deflation. How is deflation measured? Provide a formula.

b) What is the difference between disinflation and deflation?

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c) Calculate the year-on-year inflation for August 2018?

d) What is the percentage change in the cost of living between January 2012 and September 2018?

e) Explain two negative consequences of high inflation for the businesses.

f) According to the CPI newsletters, what is the real income of a nominal amount of GHC 20,000 earned in 2012 be in August 2017? What will be real income of a same nominal amount earned in 2012 be in September 2018?

Answer 1

a) Deflation is the reduction in the general level of prices in an economy which might go even below 0%. It is measured the same way as inflation by the consumer price index.

It is calculated by dividing nominal GDP by real GDP and multiplying by 100%.

b) The difference between Disinflation and Deflation is that Disinflation the rate is lower but above 0 whereas Deflation the rate is below zero(negative).

c) 2018 August inflation.

$Inflation= \frac {Nominal GDP}{Real GDP}\times100$

$Inflation= \frac {221.1}{201.3}\times100=109.8$

Inflation= 109.8-100= 9.8%

d) Percentage change in cost of living=10.8%

e)

Inflation may lead to reduction in investment which is a source of capital.

Inflation may reduce consumers purchasing power hence lack of market for goods and services.

f)

August 2017

$Real income =\frac{201.3}{100}\times20,000=40,260$

September 2018

$Real income= \frac{221.1}{100}\times20,000=44,220$