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

1. Make sure that you understand the following words and word combinations.

to boost multiplier effect information flow fiscal deficit

fiscal policy to dispose business cycle to accentuate cycles

2. Listen to the interview and decide whether the following statements are true or false (T or F).Give the reasoning.

1. Keynesians believe that if the government borrows and spends more money, economic activity will increase.

2. Keynesians want to boost domestic demand, meaning spending by households rather than businesses.

3. If the government borrows more money, this affects interest rates and business investment.

4. Monetarists say that the only result of increasing the money supply is to raise prices.

5. Keynesians believe that a government can increase the money supply without people noticing it, so that they spend more, and business invest more.

6. The goal of Keynesianism is to eliminate recessions.

7. Monetarists see neither economic advantages nor disadvantages in increasing the amount of money in circulation.

SPEAKING

A.

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.

Task: 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.

B.

Dwell on:

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

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

• Consumer Price Index.

• Demand-pull inflation. Why does it become a problem when the economy approaches full employment?

• Cost-push inflation. How does it differ from demand-pull inflation?

• Inflation and the real and nominal interest rates.