Consumer Price Index Criticism

Just as there is criticism of the unemployment rate, the CPI is not a perfect measure of inflation, and it has recently been the subject of much public debate. There are four key reasons for this criticism.

First, changes in the CPI are based on a typical market basket of products purchased that does not match the actual market basket purchased by many consumers.

Second, there are some difficulties in adjusting the CPI for changes in quality. Compare a personal computer made in the past with a new personal computer. The new computer may cost somewhat more, but it is much better than the old computer. If the quality of items improves, increases in the CPI overstate inflation.

Third, the use of a single base-year market basket ignores the law of demand. If the price of a product rises, consumers purchase substitutes, and a smaller quantity is demanded.

Finally, there have been made numerous changes in the methodology used to calculate the CPI during the 1990s. For example, now more consume substitution of goods in response to rising prices is allowed.

B. Translate from Russian into English into English.

Инфляция – это ситуация, при которой имеет место падение покупательной способности денег, результатом чего является рост общего уровня цен. Инфляция измеряется на основе относительных измерений за определенный период времени соответствующего индекса цен, обычно индекса цен на потребительские товары или дефлятора ВВП.

Инфляция, вызванная ростом издержек производства, начинается с роста некоторых элементов издержек, например бурный рост цен на нефть в 70-х годах.

Инфляция, вызванная превышением спроса над предложением, возникает из-за слишком высокого совокупного спроса.

Гиперинфляция – это исключительно высокая инфляция, когда цены растут настолько быстро, что деньги в значительной степени теряют свою функцию средства обращения.

Галопирующая инфляция – инфляция, при которой цены начинают удваиваться, утраиваться ежегодно.

LISTENING

Ex. 1. Before listening to Kate Barker, an economist, talking about interrelation between inflation and unemployment, make sure that you understand the following word combinations:

in the short run;

a trade-off between inflation and unemployment;

to be reined back;

to raise interest rates;

below the capacity level.

Ex. 2. According to what Kate Barker says, which of these alternative answers are correct?

1. It is possible for government policy

1. to reduce unemployment without affecting prices;

2. to reduce unemployment temporarily, at the cost of increased inflation;

3. to reduce unemployment permanently, at the cost of higher prices.

2. When inflation increases in industrialized countries

1. governments can choose to ignore this;

2. all governments simultaneously have to raise interest rates;

3. one country will raise interest rates, and others will soon be obliged to follow.

3. The governments in most industrialized countries

1. are much more interested in price stability than in the problem of unemployment;

2. believe that continuously low inflation will also help to keep unemployment low;

3. believe that it is necessary to choose between, on the one hand, low inflation and high unemployment, or on the other, high inflation and low unemployment.

4. The easiest way to achieve low inflation is

1. deliberately to leave some resources unused;

2. to use all a country’s resources efficiently;

3. to keep interest rates high.

5. In the long term, countries can best increase their rate of employment

1. by allowing inflation to increase;

2. by increasing productive capacity or improving the quality of the work force;

3. by taking into account the social costs of unemployment.

SPEAKING

A. Useful language: Negotiating.

Ex. 1. Study the Useful language box below.

Starting positions We’d like to reach a deal with you today. Right, let’s try to get 10% off their list prices. Exploring positions Can you tell me a little about…? What do you have in mind? Making offers and concessions If you order now, we’ll give you a discount. We’d be prepared to offer you a better price if you increased your order. If necessary … . Checking understanding What do you mean? Have I got this right? If I understand you correctly … You mean, if we ordered … would …? Are you saying …?

Refusing an offer I’m not sure about that. That’s more that we usually offer … That would be difficult for us. Accepting an offer Sounds a good idea to me. As long as we … Good, we agree on price, quantity, discounts … . Playing for time I’d like to think about it. I’ll have to consult my colleagues about that. Closing the deal I think we’ve covered everything. Great! We’ve got a deal. Following up the deal Let me know if there are any problems. If there are any other points, I’ll e-mail you.

Ex. 2. Role play these negotiations. Try to get a good outcome in each situation.

Student A is a supplier. Student B is a buyer. Supplier: You want to increase the list price of your sports bag model PX7 by 10%. You also want to change your delivery times. Buyer: You can only afford a 2 % increase. You offer to buy a larger quantity of sports bags at a lower increase. You want the delivery times to stay the same. You also want to change the length of your contract with the supplier.

Student B is a company employee. Student A is the employee’s boss. Employee: You think you should have a 10 % salary increase. Boss: You think the company can only afford a 2% increase.

B. Read the dialogue and practice the conversation between a journalist and a Finance Minister.

Journalist:	Has the policy of the government changed?
Minister:	No, we are looking towards increasing the quality of services and making the economy strong.
Journalist:	What do you predict as a level of inflation over the next 12 months?
Minister:	Inflation will continue at present levels – about 2.5 per cent.
Journalist:	Are you confident that economic growth will remain strong?
Minister:	Economic growth is now at 2 per cent and should rise to 4 per cent over the coming year.

Ex. 3. Make dialogues according to the model discussing the level of inflation and the rate of economic growth for the coming year in Belarus, the European Community and the USA.

C. Discuss the following issues:

1. What are the effects of inflation on economy and people’s well-being?

2. Why a certain rate of inflation is considered to be favourable for the economy?

3. What examples of hyperinflation do you know?

4. Why don’t prices decline during a recession?

5. Sometimes inflation is compared to a tax. How will you comment on this?

6. What is the relationship between inflation an unemployment?

7. What happens to silver and gold prices during inflation? Why?

8. What are the effects of inflation on real GDP?

9. What can be done to control inflation?

D. Dwell on:

• Inflation and hyperinflation. Their effects on economy and well-being.

• Consumer Price Index.

• Demand-pull inflation and its causes.

• Cost-push inflation and its sources.

• Inflation and the real and nominal interest rates.

• The current level of inflation in the USA, EU and Belarus.