Ex 2. Work in pairs. Make up dialogues discussing plusses and minuses of working part-time for students

Ex 3. Role play: You are a potential employer (choose the sphere yourself) and would be glad to hire a few students for part-time employments. Hold an interview with your potential employees trying to find out the following information:

- whether they are successful students (their academic performance);

- their basic skills;

- their interests and hobbies;

- how they are going to combine studies and work;

- their motivation;

- how much time they can devote to work;

- the qualities of their characters that could be useful for the job;

These words and word-combinations may help you: an applicant, a would-be-boss, an application, a CV, to be highly motivated, to manage a tight schedule, a dire need for additional resources, to learn valuable lessons, to broaden one’s scope, to be hourly paid, punctuality, diligence, responsibility, accuracy, discipline, an ability to work under the strain.

Unit VII

Part 1

Inflation, Deflation and Price Stability

inflation, deflation, purchasing power, overall price level, consumer price index, “market basket”, inflation rate, “individual basket”, individual rate of inflation, price stability, living standards, hyperinflation

Text A

Inflation and Deflation

Inflation and deflation are important economic phenomena that have negative consequences for the economy. Basically, inflation is defined as a general, or broadly-based, increase in the prices of goods and services over an extended period which consequently leads to a decline in the value of money and thus its purchasing power.

Deflation is often defined as the opposite of inflation, namely as a situation in which the overall price level falls over an extended period.

When there is no inflation or deflation, we can say that there is price stability if, on average, prices neither increase nor decrease but stay stable over time. If, for instance, EUR 100 can buy the same basket of goods as it could, say one and two years ago, then this can be called a situation of absolute price stability.

Movements in individual prices and in the general price level

It is important to make a distinction between movements in prices of any individual good or service and movements in the general price level. Frequent changes in individual prices are quite normal in market-based economies, even if there is price stability overall. The changes in supply and / or demand conditions of individual goods or services inevitably lead to changes in their price. For example, in recent years we have seen substantial declines in the prices of computers and mobile phones, mainly resulting from rapid technological progress. However, from the beginning of 1999 to mid-2006, oil and other energy prices increased, partly as a result of concerns regarding the future supply of energy and partly as a result of increased demand for energy, in particular from fast-growing economies. On the whole, inflation in most industrialized countries remained low and stable – stability in the general price level can go hand-in-hand with substantial changes in individual prices as long as falling and rising prices offset each other so that the overall price level remains unchanged.

Measurement issues

How can inflation be measured? There are millions of individual prices in an economy. These prices are subject to continuous moves which basically reflect changes in the supply of and the demand for individual goods and services and thus give an indication of the “relative scarcity” of the respective goods and services. It is obvious that it is neither feasible nor desirable to take all of these prices into account, but neither is it appropriate to look at just a few of them, since they may not be representative of the general price level.

Consumer Price Index

Most countries have a simple common-sense approach to measuring inflation, using the so-called “Consumer Price Index” (CPI). For this purpose, the purchasing patterns of consumers are analyzed to determine the goods and services which consumers typically buy and which can therefore be considered as somehow representative of the average consumer in an economy. As such they do not only include those items which consumers buy on a day-to-day basis (e. g. bread and fruit), but also purchases of durable goods (e. g. cars, PCs, washing machines, etc.) and frequent transactions (e. g. rents). Putting together this “shopping list” of items and weighting them according to their importance in consumer budgets leads to the creation of what is referred to as a “market basket”.7 Each month, a host of “price surveyors” checks on the prices of these items in various outlets. Subsequently, the costs of this basket are then compared over time, determining a series for the price index. The annual rate of inflation can then be calculated by expressing the change in the costs of the market basket today as a percentage of the costs of the identical basket the previous year.

However, the developments of the price level as identified by such a basket only reflect the situation of an “average” or representative consumer. If a person’s buying habits differ substantially from the average consumption pattern and thus from the market basket on which the index is based, that person may experience a change in the cost of living that is different to the one shown in the index. There will therefore always be some people who experience a higher “inflation rate” for their “individual basket” and some who face a lower “individual rate of inflation”. In other words, the inflation measured by the index is only an approximate measure of the average situation in the economy; it is not identical to the overall price changes faced by each individual consumer.

Measurement problems

For various reasons, there are some difficulties associated with any attempt to express the overall change in prices as one number.

First, an existing basket usually becomes less and less representative over time, as consumers increasingly substitute more expensive goods for cheaper ones. For example, higher petrol prices might lead some people to drive less and buy a higher quantity of other goods instead. Therefore, if the weights are not adjusted, the change in the index may slightly overestimate the “true” price increases. Second, changes in quality are sometimes difficult to incorporate into the price index. If the quality of a product improves over time and the price also rises, some of the change in price is due to the improved quality. Price increases which are due to quality changes cannot be considered as giving rise to inflation, as they do not reduce the purchasing power of money. Changes in quality are commonplace over long periods of time. For example, today’s cars differ considerably from those manufactured in the 1970s, which in turn were very different from those of the 1950s. Statistical offices spend a lot of time making adjustments for quality changes, but by their very nature such adjustments are not easy to estimate. Apart from new varieties of existing goods (e. g. the introduction of new breakfast cereals), an important and difficult subject is the inclusion of new products. For example, after DVD players came on the market, there was an inevitable time lag until they could be captured in price statistics, since information on the market shares, the main distribution channels, the most popular makes, etc., was needed. But if it takes too long to incorporate new products into the price index, the price index fails to fully reflect the actual average price changes that consumers are facing.

In the past, a number of economic studies have identified a small but positive bias in the measurement of national consumer price indices, suggesting that a measured inflation rate of, say, smaller than 1/2 percentage point might in fact be consistent with “true” price stability. For the euro area (i.e. all the EU countries that have adopted the euro as their currency), no precise estimates for such a measurement bias are available. However, one can expect the size of such a possible bias to be rather small for two reasons. First, the Harmonized Index of Consumer Prices (HICP) – this is a harmonized CPI for all euro area countries – is a relatively new concept. Second, Eurostat, the European Commission agency responsible for this area of statistics at the EU level, has attempted to avoid a measurement bias in the HICP by setting appropriate statistical standards.