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Help me understand jargon like consumer price index, inflation, interest rates etc Watch

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    Some key words/concepts and their inter-relationships I do not understand. I would appreciate it if you could explain what a good economic situation would be and what a bad one would be. We hear these words in the News all the time, but I have no idea how to understand them.

    What is interest rate? Should the interest rate set by the Bank of England be high or low for a good economy?

    What is the consumer price index, how should it relate to other factors eg. interest rate. How is retail price index and consumer price index relate?

    Why should inflation by low or high? How does it relate to the other concepts?

    What is needed for a good economy, or what makes good news.
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    This is probably the wrong board to be asking these things in, next time you might want to look at the study help section.

    Never the less:

    Interest rates are how much you pay the average bank for borrowing money (i.e. loans, mortgages) and how much they'll pay you for saving your money in their branches. The Base Rate (Bank of England's interest rate) is how much it lends to markets, it influences the amount of interest banks will ask from you or give you when you use their branches. When interest rates are low, like they are at the moment, it is relatively cheap for everyone to borrow money from banks and spend it on things like cars or houses. On top of this people might prefer to spend their money rather than save it in banks as low interest rates mean they don't get paid as much to put their money in a bank. Companies do the same thing, it's cheap to borrow and it's a waste to save so they might spend their money on hiring new staff or buying new equipment to produce more. This can be good for the economy by encouraging more people to spend more > companies earn more > employees earn more > people spend more. Overall this decreases unemployment and makes our economy grow, low interest rates are good for the economy at the moment.
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    Investopedia and MBA bulls**t.com.

    Their Youtube clips are great.
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    The Consumer Price Index (CPI) is what is used to measure inflation or the current price level. Inflation occurs when there is a persistent increase in the general price level, ie. the percentage of the general increase in prices over a certain period of time.

    The Bank of England/government sets a 2% inflation target which the BoE tries to achieve through its use of Monetary Policy. If inflation is over +/- 1% of the target the governor must write a letter of explanation to the chancellor. Generally low inflation is best, at current UK levels it isn't great but it is improving.

    Hope this helps!
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    It could be argued that low interest rates lead to an increase in inflation as it encourages savers to spend which boosts aggregate demand (total planned demand in an economy) which may lead to demand-pull inflation, but really it depends on so many different factors.

    They are quite difficult concepts but hopefully this has helped and not confused you more!
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    I stopped half way through as I gathered OP was doing last minute revision for the macroeconomics exam on Friday. Although I doubt he'd have done well if he was asking what all of these terms were the day before..
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    (Original post by Donniee)
    I stopped half way through as I gathered OP was doing last minute revision for the macroeconomics exam on Friday. Although I doubt he'd have done well if he was asking what all of these terms were the day before..

    Not necessarily, they do use these terms on the news.

    I took that exam also, I'm guessing you did, how did it go? You do context 1 or 2?
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    (Original post by MoTown200)
    Some key words/concepts and their inter-relationships I do not understand. I would appreciate it if you could explain what a good economic situation would be and what a bad one would be. We hear these words in the News all the time, but I have no idea how to understand them.

    What is interest rate? Should the interest rate set by the Bank of England be high or low for a good economy?

    What is the consumer price index, how should it relate to other factors eg. interest rate. How is retail price index and consumer price index relate?

    Why should inflation by low or high? How does it relate to the other concepts?

    What is needed for a good economy, or what makes good news.
    The interest rate is the rate you pay to borrow money, the Base Rate is set by the Bank of England and banks use this as a guide but they can pretty much charge anything they like. Although the Base Rate is 0.5% for example if you want to borrow for house you'll probably pay 5-6% and if you want an unsecured loan you could pay anything from 7/8/9%+. Credit card borrowing is even more expensive!

    CPI and RPI are two seperate measures of inflation. They take a basket of goods one year and then compare prices 12 months down the line to see how much they're risen by. The main difference between the two indices is that RPI contains housing costs like rent and mortgage interest repayments whereas CPI does not.

    Inflation is a tricky one. You probably want your wages to go but aren't so happy when the price of milk/bread/petrol goes up. Inflation to a certain extent is natural, if bad weather ruins a certain crop this year it'll probably go up in price to due it's scarcity, but this causes more farmers to grow the crop next year to take advantage of higher prices. This form of inflation is good then because it sends out signals to producers and guides them to produce whatever is in greatest demand.



    All this concepts are tricky to grasp because they're often explained poorly and most people (even so called 'professionals') don't really understand how the economy works. I'm by no means an expert, but I think I've most of the basics nailed if there's anything you want to go over.
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    (Original post by Thriftworks)
    Not necessarily, they do use these terms on the news.

    I took that exam also, I'm guessing you did, how did it go? You do context 1 or 2?
    Context 2, I don't know very many who ended up doing context 1, it seemed a lot easier to write about the pro's and con's of a current account surplus.

    Overall it went fine for me, what about you?
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    There have been good answers already; all I would add is that the interest rate shouldn't be "high or low" for better economic performance; instead it should - and does - fluctuate based on economic conditions. The Bank of England's primary concern is to achieve inflation of 2% per annum, with some consideration of other economic factors. Therefore whilst it is generally accepted that a low interest rate is good for the economy now, in the future a higher interest rate could be more appropriate.
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    (Original post by chefdave)
    Inflation is a tricky one. You probably want your wages to go but aren't so happy when the price of milk/bread/petrol goes up. Inflation to a certain extent is natural, if bad weather ruins a certain crop this year it'll probably go up in price to due it's scarcity, but this causes more farmers to grow the crop next year to take advantage of higher prices. This form of inflation is good then because it sends out signals to producers and guides them to produce whatever is in greatest demand.
    I think you are confusing the effects of relative price movements with the effects of inflation. A fall in real wages is bad regardless of which direction the price level is moving. Similarly, you want an increase in the relative price of grain after a famine but this doesn't mean there needs to be an increase the price level (there probably will be as well, but much smaller than the increase in the price of food).
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    (Original post by PicardianSocialist)
    I think you are confusing the effects of relative price movements with the effects of inflation. A fall in real wages is bad regardless of which direction the price level is moving. Similarly, you want an increase in the relative price of grain after a famine but this doesn't mean there needs to be an increase the price level (there probably will be as well, but much smaller than the increase in the price of food).
    With respect I don't think I'm confusing anything. I've given these terms a lot of thought since 2007/8 when I began teaching myself economics and I'm confident I've nailed the basics.

    I don't want an increase in the price of grain during or after a famine as price increases are rarely a good thing, but they're more likely to increase as people compete with each other to get their hands on this increasingly scarce commodity. These high prices in turn send a signal to producers and encourages them to produce more grain until prices drop to a sustainable level.

    A lot of right-wing thinkers fall into the trap of believing that all inflation is negative because it reduces the real value of money, I was merely pointing out that this is utter codswallop. Inflation is an entirely natural phenomenon in a free market, if prices rise in one sector it draws resources in until supply is able to meet demand. This virtuous process fails if the state attempts to arbitrarily extinguish all forms of inflation.
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    (Original post by Donniee)
    Context 2, I don't know very many who ended up doing context 1, it seemed a lot easier to write about the pro's and con's of a current account surplus.

    Overall it went fine for me, what about you?

    Context 1, they gave you the evaluation for the for argument in the extracts
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    (Original post by chefdave)

    I don't want an increase in the price of grain during or after a famine as price increases are rarely a good thing, but they're more likely to increase as people compete with each other to get their hands on this increasingly scarce commodity. These high prices in turn send a signal to producers and encourages them to produce more grain until prices drop to a sustainable level.
    But this is all to do with the movement of relative prices - the movement of the price of grain relative to the price of other goods sends a signal to producers to produce more grain - rather than to do with the level of average prices.
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    (Original post by PicardianSocialist)
    But this is all to do with the movement of relative prices - the movement of the price of grain relative to the price of other goods sends a signal to producers to produce more grain - rather than to do with the level of average prices.
    Ok, I agree with this but I'm not too sure what I'm meant to take from it.
 
 
 
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