Explain how the CPI is calculated
Explain how the CPI is calculated (6)
CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The basket of goods is a price survey that is taken from 10,000 households across the UK. The households are asked to record what they buy for two weeks and from this the 699 most occurring goods from all households are price checked from varying places across the UK and then are placed into the basket of goods. The goods are weighted according to their importance i.e. petrol would be more important than CDs and would therefore be more weighted.
Analyse two possible reasons why the CPI measure of inflation was above its target range in 2011 (8)
One reason why the CPI measure of inflation was above its target was because of rising import prices such as oil or commodity goods. This is shown in the first article given from The Guardian News and Media. If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation / depreciation means the Pound is worth less, therefore we have to pay more to buy the same imported goods. In 2011 there was a decrease in the pounds value up against the euro which is what could’ve caused this. This is called cost-push inflation.
The second reason why the CPI measure of inflation was above its target in 2011 was because of an increase in nominal wages, this would lead to higher cost productions for firms. If trades unions can present a common front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms.
Asses the likely impact of a reduction in household’s real income on the standard of living in the UK (12)
Real income is the income of individuals or nations after adjusting for
CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The basket of goods is a price survey that is taken from 10,000 households across the UK. The households are asked to record what they buy for two weeks and from this the 699 most occurring goods from all households are price checked from varying places across the UK and then are placed into the basket of goods. The goods are weighted according to their importance i.e. petrol would be more important than CDs and would therefore be more weighted.
Analyse two possible reasons why the CPI measure of inflation was above its target range in 2011 (8)
One reason why the CPI measure of inflation was above its target was because of rising import prices such as oil or commodity goods. This is shown in the first article given from The Guardian News and Media. If there is a devaluation then import prices will become more expensive leading to an increase in inflation. A devaluation / depreciation means the Pound is worth less, therefore we have to pay more to buy the same imported goods. In 2011 there was a decrease in the pounds value up against the euro which is what could’ve caused this. This is called cost-push inflation.
The second reason why the CPI measure of inflation was above its target in 2011 was because of an increase in nominal wages, this would lead to higher cost productions for firms. If trades unions can present a common front then they can bargain for higher wages. Rising wages are a key cause of cost push inflation because wages are the most significant cost for many firms.
Asses the likely impact of a reduction in household’s real income on the standard of living in the UK (12)
Real income is the income of individuals or nations after adjusting for