Hi5003 Economics For Business: Consumer Assessment Answers
Calculate the rate of inflation based on the CPI and the rate of average weekly earnings growth and plot the inflation rate and weekly earnings growth on a single diagram using time on the horizontal axis. Provide an economic interpretation of these time series plots.
Answer:
Consumer price index is the measure of price changes representing the weighted average of a basket of goods and services. The change or growth rate of consumer price index from one year to another is the inflation rate which is the rate at which prices of goods and services increases (Mankiw, 2014).
Average weekly earnings are the ratio of the total earning estimated of each week divided by the number of employees.
In the table below we have tabulated the data collected from ABS. The inflation rate and the growth rate of average weekly earnings is calculated.
|
Year |
CPI |
Average weekly earning(in dollars) |
Inflation |
Growth |
|
2005 |
82.975 |
792.4 |
2.691832 |
5.435433 |
|
2006 |
85.925 |
828.55 |
3.555288 |
4.56209 |
|
2007 |
87.925 |
865.85 |
2.327611 |
4.501841 |
|
2008 |
91.75 |
897.25 |
4.350299 |
3.626494 |
|
2009 |
93.375 |
936.8 |
1.771117 |
4.407913 |
|
2010 |
96.1 |
986.6 |
2.91834 |
5.315969 |
|
2011 |
99.275 |
1024.45 |
3.30385 |
3.836408 |
|
2012 |
101.025 |
1067.25 |
1.76278 |
4.177852 |
|
2013 |
103.5 |
1109.6 |
2.449889 |
3.968142 |
|
2014 |
106.075 |
1125.85 |
2.487923 |
1.464492 |
|
2015 |
107.675 |
1141.3 |
1.508367 |
1.372296 |
Source: Australian Bureau of Statistics, CPI : Catalogue 6401.0; Average weekly earnings: Catalogue 6302.0; (ABS, 2016)
On plotting the inflation rate and average weekly earnings we get the graph as below.
From the above graph we see how the trends in the inflation rate and growth rate of average weekly earnings had been over the time period of 2005 to 2015. We see that the trend in both the indicators had been similar over the time period. Based on theory of economics, it is seen that growth rate of wages follow the same trend as that of inflation rate. When inflation rate rises, the rate of growth of average weekly earnings also increase. Periods of higher inflation are periods of higher nominal wage growth and lower real wage growth (Samuelson et al, 2010).
In the case of Australia, we see how periods of very high inflation are seen to experience periods of lower growth of weekly earning. We see how with the increase in inflation from 2013 to 2014 growth rate of weekly wage earnings fall and continue to fall till 2015.
References
Mankiw, G. (2014). Macroeconomics. New York: Worth publishers,
Samuelson, P. & Nordhaus, W. (2010). Economics. New Delhi: Tata McGraw Hill
ABS, Australian Bureau of Statistics. (2016). Consumer Price Index. Catalogue 6401.0. Table 1 and 3.
ABS, Australian Bureau of Statistics. (2016). Average weekly earnings. Catalogue 6302.0. Table 3.
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