Cost-push Inflation

Topics: Inflation, Central bank, Gross domestic product Pages: 6 (1474 words) Published: October 1, 2013
Question 2:

(a) Which of the following are final goods and services and which are intermediate goods and services? Please explain why in your answer. (4 marks – 1 mark each)

(i) A new bulldozer to be used by a construction company;

When a construction company buys and uses a new bulldozer becomes intermediate goods when it is used in the production of their products services in subsequent periods. (ii) A windscreen purchased by a motor vehicle spare parts supplier;

Intermediate goods – by national accounts (GDP) windscreen primary production value has already been accounted. It is being resold at a deflated value as second hand goods. (iii) A home call car tuning service as a franchise of large national chain;

Final good – the resale value of the business contain value added. But it is not previously included in the national accounts.

(iv) Coking coal

Intermediate goods – as an ingredient it used into the production of other goods. As iron and steel, steam. Except being sold by exporting.

(b) An economy produces final goods and services with a market value of $900 billion in a given year, but only $875 billion worth of goods and services is sold to domestic or foreign buyers. Is this nation’s GDP $900 billion or $875 billion? Explain your answer. (2 marks)

(c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods. (2 marks) Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP? (2 marks)

Question 3:

(i.a) Illustrate and explain with diagrams the difference between demand-pull and cost-push inflation; (2.5 marks for the diagram and 2.5 marks for the explanation);

(i.b) Provide (describe) two (2) causes of each type of inflation
(2.5 marks for 2 demand-pull causes and 2.5 marks for 2 cost-push causes)

Cost-push inflation is an inflation that results from an initial increase in costs. Two reasons why costs might rise:

1. Component costs: e.g. an increase in the prices of raw materials and components. This might be because of a rise in global commodity prices such as oil, gas copper and agricultural products used in food processing – a good recent example is the surge in the world price of wheat.

2. Rising labor costs - caused by wage increases that exceed improvements in productivity. Wage and salary costs often rise when unemployment is low (creating labor shortages) and when people expect inflation so they bid for higher pay in order to protect their real incomes.

Demand-pull inflation is an inflation that results from an initial increase in aggregate demand. Two possible causes of demand pull inflation are:-

1. A depreciation of the exchange rate which makes exports more competitive in Overseas markets leading to an injection of fresh demand into the circular flow and a rise in national and demand for factor resources – there may also be a positive multiplier effect on the level of demand and output arising from the initial boost to export sales. 2. Improved business confidence which prompts firms to raise prices and achieve better profit margins.

Question 7:
(a) The consumer price index (i.e. CPI) is the most commonly used measure of changes in the general level of prices in Australia. Discuss some of the advantages and disadvantages of using this measure. (4 marks)

(b) Explain why some people ‘lose’ from inflation and why do some people ‘win’ from inflation? (6 marks)

Answer:
(A)
It measures the change in price of a fixed market basket of goods and services from one period to another.

Advantages:-
1. A high annual percentage increase in the CPI reflects a high rate of inflation. 2. The CPI also determines the percentage of annual increase or decrease in income. 3. The federal government also uses the CPI to adjust Social Security and...
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