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The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015 - Edexcel - A-Level Economics A - Question 3 - 2017 - Paper 2
Question 3
The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015. Annual percentage change in prices (Source: http://www.ons.gov.uk/... show full transcript
Worked Solution & Example Answer:The chart below shows UK inflation as measured by the Consumer Prices Index (CPI), 2011 to 2015 - Edexcel - A-Level Economics A - Question 3 - 2017 - Paper 2
Step 1
Which one of the following statements is correct about the UK's inflation record between September 2011 and January 2013?
Answer
The correct answer is B. disinflation. Disinflation refers to a decrease in the rate of inflation, meaning prices are still rising but at a slower rate than before. This is evident in the chart as the CPI shows a gradual decline in the rate of price increases during that period.
Step 2
With reference to the data provided, explain the process of calculating the rate of inflation in the UK using the Consumer Prices Index. Refer to the concept of weights in your answer.
Answer
To calculate the rate of inflation using the Consumer Prices Index (CPI), the following process is typically followed:
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Inflation Rate Measurement: The inflation rate measures the change in average prices in an economy over a specific time frame. This is calculated by comparing the current price level with a previous price level.
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Representative Basket: A representative basket of goods and services is constructed, which reflects the spending habits of average households. This basket includes a wide range of categories such as food, clothing, transportation, and healthcare.
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Price Survey: Regular surveys are conducted to record the prices of the items in the basket. This helps in determining how prices are changing over time.
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Base Year: The CPI is often compared to a base year, which is a point in time used as a reference for measuring changes in price levels.
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Weighting: Each item within the basket is assigned a weight according to its proportion of household spending. For instance, if food and fuel constitute a significant part of a household's expenses, they will be given more weight in the calculation. This reflects their higher impact on the overall inflation rate.
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Final Calculation: The CPI value is then calculated and expressed as a percentage increase or decrease compared to the previous period.
For example, in January 2015, the CPI indicated that the inflation rate was 0%. This indicates that, overall, prices remained stable compared to the base year.