A level Economics help

https://tinypic.host/image/snel4

I am learning index numbers at the moment and while I understand what they are and what they are used for, I don't get this picture.

It says that the 'real price of beer has fallen in recent years' but I don't understand why because the curve is above the base.

Any help would be much appreciated!

Reply 1

KingPrivateSwiss

Original post by fox473

Index numbers just show the value of a year in comparison to a particular benchmark year - you can take it as that being the actual value when making calculations.

In simple terms, the real price is the price of a good or service adjusted for inflation (which means compared to current prices). If the price level (measured with CPI in this graph) has risen, but the price of beer has risen at a lower rate, then the real price of beer has fallen.

I guess you could think about it like this:

Yesterday, you had 10 oranges, and everyone else also had 10 oranges.
Today, you have 12 oranges, but everyone else has 20 oranges.

Your number of oranges has risen, and so have everyone else's.
But your real number of oranges has fallen, because compared to everyone else you have less.

I hope this helps 🙂

Reply 2

fox473

Thank you for your reply - I understand now! I kind of forgot that the whole point of the CPI is to measure inflation lmao

Reply 3

fox473

https://tinypic.host/image/O8B5Q

What about this one? The article says that productivity in France is not falling, but just rising more slowly than that of Britain, but how do we know that?

I understand that the productivity gap between France and Britain is closing from the gap, but why can't France's productivity be decreasing? (common sense i know but just from the graph) - and what would the graph look like if France's productivity was decreasing?

Sorry if I am just asking silly questions

Reply 4

KingPrivateSwiss

Now this one is a bit more difficult to understand.

By looking at the Britain line, we can see it's horizontal. Of course, Britain's productivity isn't constant over so many years: what's really happening is that Britain is being used as the benchmark *for each year*.

As a result, if France's productivity is rising but Britain's is rising faster, then France's index number will fall from year to year as Britain's remains at 100 because its the benchmark.

The Calculation Is:
France's Index Number for Year = France's Productivity for Year ÷ Britain's Productivity for Year X

This is a bit more difficult to give a metaphor for without complicating it even more, but I'll give it a try.

If two cars are racing car A and car B.
Car A is in front of car B.
Car B is moving faster than Car A.
As a result, Car B will get closer and closer to Car A, until they are next to each other.
From Car A's perspective, Car B is getting closer to it, even though Car A is still moving fast.

I hope this still helps, if the metaphor doesn't help then ignore it!

Reply 5

fox473

Thank you so much for your reply!

I understand that France's index number is decreasing because it's productivity is getting closer to Britain's - but is it just by common sense that we know that both countries' productivity is rising, just at different rates? Is there any way to tell if France's productivity is actually decreasing while Britain's is increasing, or if both countries' productivity is decreasing but France is decreasing faster?

Thank you

Reply 6

KingPrivateSwiss

As Britain's index number for each year is the benchmark for each year, we have no way of telling whether it's increasing or decreasing when using this particular graph. As a result, we can't tell whether Frances is increasing or decreasing. I guess that's why the caption is needed, but now I understand your question 🙂.