Education Information

2. Some definitions

There is nothing mysterious about how the economy operates. It is about how we work with each other to produce the things that we need and use, from cars to construction to telesales. But the way we do this is organised primarily around profits, which are obtained by a small group at the top of society. And so, understanding how the economy works is about understanding property and power: who owns the resources and commands the wealth produced by society, and who creates it for them? This is not how economic issues, including the “cost of living crisis”, are typically presented to us. In the news and elsewhere, the economy seems like a vast and strange machine that makes demands on us, or forces us and our families to take economic pain. Reporting on economic affairs in the UK usually focuses on the complex workings of financial markets that are often presented as being as unpredictable as the weather with only a few “experts” able to understand them. “Inflation” is the rate at which prices are increasing on average. If inflation is 9.4%, it means that prices have gone up 9.4% since this time last year. So, something which was £10 this time last year is likely to cost £10.94 this year. The major effect of prices rising is that the value of money falls – you can buy less than you used to be able to with each £1 when prices go up, and the higher the rate of inflation, the faster your money falls in value. It is important to remember that the inflation figure is only an average, and most goods and services will change in price faster or slower than the average figure. To find this average rise from all the different price changes, government statisticians at the Office for National Statistics (ONS) put together a “basket of goods” which is supposed to represent what an “average” household would consume in a month – what share of their income is spent on food, or housing, or fuel, and so on. To cut through the confusion, we must first clearly define some of the jargon normally used.

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