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Indexation With Reference To Brazil. Essay

4153 words - 17 pages

IndexationWith reference to BrazilPaolo Rigutto6F5th of March 2002Economics HigherPaolo RiguttoDiscussion PaperTHE EFFECT OF INDEXATIONBrazil is known all over the world as a third world country that has a very large population where the greater part of the people live in a poor state of live and have no fixed income. Brazil became very famous for its inflation rates. Inflation is the persistent general rise in prices over a certain amount of time. Before I can continue and explain the current situation in Brazil and the inflation in Brazil I must explain the following term: Indexation. Indexation are the variables in an economy, so things that can change at any time, such as wages and interest rates are increased by the same amount as inflation increases. If this were to happen it would mean that the real purchasing power workers would have would stay the same instead of decreasing because of inflation. Also sometimes the real purchasing power of workers can increase if the pay rise that they are given is greater than the inflation yet this can lead to more inflation as there will be more spending. Indexation is used with one of two types of inflation, it is can be utilised when dealing with anticipated inflation. Anticipated inflation is inflation that was expected and that it was no higher or lower than what the people or government thought, it is hard to anticipate inflation accurately yet sometimes it is constant for a certain amount of years. For instance it could have been at a constant rate of 4% for the previous five years and if it were so the government would use this information to make sure that it was in their plans. The other type of inflation is unanticipated inflation, this is the opposite of the inflation discussed above and is when inflation rises or falls unexpectedly, this can be bad for workers as they may lose their real purchasing power. As I have already stated indexation is used with anticipated inflation because of the fact that it can be used to settle wage rates. For instance if the was a constant inflation of 4% a trade union could ask for a pay rise of 2% including the change in inflation or the change in the Retail Price Index (RPI). This is done to rest the workers assure and take some pressure of the shoulders of the government as it wont have to worry that much about the problems with inflation. Yet it must be noticed that indexation is only a part-time pain killer yet it does nothing to take away or lower the inflation.Inflation is calculated by using the RPI and it is important that before we can accurately look at the effects of inflation in Brazil and how indexation can be used that we look at the RPI. The problem with measuring inflation is that it is not an easy process and that, as will be shown further on, inflation is not the same for every person. This is because some people will be affected more than others depending on what they buy. It is extremely important to view the way the RPI is measured and...

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