Example research essay topic: Inflation And The Australian Economy - 980 words

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Inflation is one of the most important features of the Australian Economy. It is basically the measure of how much prices rise each year. The most common and widely acceptable unit for measuring inflation is the Consumer Price Index (CPI). During 2000 - 2002, there have been many factors contributing to inflation, especially in the March Quarter of 2002. Generally in most cases, governments try to maintain low inflation levels to stabilise the economy. Inflation is the loss in purchasing power of a currency unit such as the dollar, usually expressed as a general rise in the prices of goods and services.

A classic example is the Great Inflation of the Roman Empire. Successive emperors replaced a steadily increasing fraction of the silver in their ancient currency, the denarius, with base metals like bronze or copper. As a result prices rose inexorably despite repeated attempts to restrain them through legislation. Diocletian, rather than taking responsibility for the debasement, attributed the rapid inflation of his day to the avarice of his subjects. His famous edict of AD 301 threatened with death any vendor who charged prices exceeding official limits.

But inflation ran along unhindered for another century until an alternative currency, an un depreciated gold coin known to Shakespeare as the bezant, became the customary unit of account, spreading throughout Europe and lasting well into the Middle Ages. We have many measures of inflation, but none provides a truly reliable gauge of inflation at any specific time. The most widely watched measure is the consumer price index (CPI). Sub indexes are available for different cities and for many different classes of goods and services. One problem with the CPI is that the weight attached to each class of goods and services is held constant for years at a time.

Therefore, when consumers lower their cost of living by buying more items whose relative price has fallen and fewer items whose relative price has risen, the CPI will not show a decline in the cost of living. Moreover, the difficult problem of allowing for changing quality has never been solved. Nor can the government inspectors who collect the data from retailers track down all the sales and discounts of which consumers are so keenly aware. As a result of these and other factors, the consumer price index reflects inflation trends only with a long delay and portrays an artificially smooth path for the inflation rate. In the March quarter 2002, The CPI increased by 0. 9 per cent to be 2. 9 per cent higher through the year. This returns inflation to within the target band and is consistent with the Mid-Year Economic and Fiscal Outlook (MYEFO) forecast for inflation of 2 per cent in 2001 - 02.

There are several factors contributing to this level of inflation. Price rises were recorded for pharmaceuticals (up around 11 per cent due to the annual resetting of the safety net in January), holiday travel and accommodation (up 4. 7 per cent, driven by the effect of the Ansett and September 11 insurance levies and domestic seasonal factors), education (up 4. 7 per cent with the start of the new school year), insurance services (up 2. 6 per cent with moderate rises in key components) and meat and seafood (up 1. 8 per cent with overseas demand continuing to remain strong). Due to The CPI reaching less than 3 % throughout the whole year, Australia is enjoying a very favourable combination of strong economic growth and moderate inflation. Generally, in most cases, governments try to maintain a low level of inflation to stabilise the economy. Low levels of inflation are desirable since there are some costs and consequences of high inflation.

Firstly, money loses its buying power as further on more money is required to be spent on the same objects and as a result the standard of people on low, fixed or single incomes is reduced. Secondly the distribution of income becomes more uneven as during periods of high inflation, income seems to be distributed away from the poor and to the rich since the price of shares, real estate and antiques tend to rise at a rate faster than the inflation rate. Additionally, high inflation creates uncertainty and may lead to unemployment as firms substitute capital or machinery for labour. Furthermore, Australias international competitiveness is reduced if our inflation rate is greater than that of our major trading partners (OECD Countries) as Australias exports become more expensive than that of other countries on the international market while imports into Australia are relatively cheaper than Australian made products.

Effectively this means Australia sells fewer exports and buys more imports thereby increasing the current account deficit (CAD) and external debt while reducing our economic activity. All in all, these are the major drawbacks of high inflation however there are a few people or organisations who gain from inflation. Some of these include long term borrowers. Since money is worth less on the long run then loans are easier to repay. Also people who keep their capital in the form of real estate or shares benefit at times of high inflation since their assets normally rise at a rate faster than that of the inflation rate.

So to sum up, inflation has a few advantages but a government would rather try to maintain low inflation since there are worse consequences of high inflation rates. From this we can say that inflation is a measure of how much prices rise each year and the unit for measuring inflation is the Consumer Price Index (CPI). During 2000 - 2002, there have been many factors contributing to inflation, especially in the March Quarter of 2002 and in most cases, governments try to maintain low inflation levels to stabilise the economy. Through all these points it can be concluded that inflation is a very important feature of the Australian Economy.

Research essay sample on Inflation And The Australian Economy