Question

New Zealand's government has increased its spending this year, leading to a growing budget deficit.

At the same time, the Reserve Bank of New Zealand (New Zealand's central bank) said it would continue to try to stimulate the economy. This stimulus is likely to lead to rising prices for consumer goods, even as the prices of producer goods remain low.

1.How should we expect inflation as measured by CPI and as measured by the GDP deflator to compare to each other in the future in New Zealand? Why?  

2.Inflation in New Zealand is expected to pick back up in the near future.

How will this inflation affect the economy? Your answer should discuss costs, benefits, winners, and losers from this inflation.

Answer 1

Answer1: CPI is an economic indicator that is most frequently used for identifying periods of inflation (or deflation). It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.

Where as using the GDP price deflator helps economists compare the levels of real economic activity from one year to another. The rate of inflation is calculated by using the basic percentage change formula with either two CPI numbers or two GDP deflator numbers: (new − old)/old × 100.

The GDP price deflator is a more comprehensive inflation measure than the CPI index because it isn't based on a fixed basket of goods.

Answer2: Effect of Inflation on economy in terms of costs, benefits, winners, and losers are as follows:

Cost: Higher inflation will raise the cost of living. The impact on workers depends on what happens to nominal wages. For example, if inflation is caused by rising demand and falling unemployment, firms are likely to raise wages to keep attracting workers. In this case, workers real wages will continue to rise.

Benifits: It is happens when increase in money supply and production falls. Inflation brings most benefits to debtors because people seek more money from debtors in order to meet the increased prices of commodities. ot in other words it will benefit those with large debts who, with rising prices, find it easier to pay back their debts

Winners: Debtor on fixed repayment plans, Government with high public sector debt, Owner of land and physical assets, firms who can cut real wages.

Losers: Savers, retirees living on fixed income, worker on fixed incomes, whole economy from general economic uncertainities, Exporters less compitetive.