What is Inflation?
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation increases, every rand you own buys a smaller percentage of goods and services.
*Deflation is when the general level of prices is falling.
*Stagflation is the combination of high unemployment and economic stagnation.
Causes of inflation
In the current state there is no specific cause that the economist agreed about, but at least there are two theories which are generally accepted. The demand –pull-inflation and cost-push-inflation.
The demand –pull-inflation
It happens when there is “enough money chasing few goods”, in simplest form, if demand is growing faster
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*Higher indirect taxes – imposed by the government for example for an increase in the specific duty on alcohol and ciggarettes,an increase in fuels duties or maybe a rise in the standard rate of value added or an extension to the range of products to which VAT is applied.
The aggregate supply curve
Cost-push inflation
It happens when business cost rises, they need to increase prices to balance their profit merges .Increased costs can include items such as wages, taxes or increased costs of imports.
*AD might rise for a number of reasons, some of which occur together at the same moment of the economic cycle
*Depreciation of the exchange rate_-which raises the price of imports and reduces the foreign price of UK exports.
*A reduction indirect or direct taxation-if direct taxes are reduced consumers have more available income causing demand to increase.
*The rapid growth of the money supply-maybe as a consequence of increased bank and building society borrowing if interest rates are low and consumers’ confidence is high. The aggregate supply curve Types of
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Food and non-alcoholic beverages prices rised by a modest 0, 1% between May and June resulting in an unchanged 8, 8% annual rate. Specific food items which continue to exert upward pressure on inflation are white bread (monthly increase of 1, 9%) and full cream milk (monthly increase of 2, 5%). Strong price decreases were recorded in fruit and vegetables (-4, 6% and -1, 8% respectively).
The main upward drivers of the monthly change in the CPI were the quarterly surveys of housing rents and domestic worker wages. Owners’ equivalent rent with a weight of 11, 4% increase by 1, 3% from March with an annual increase of 5%. Domestic worker wages has an annual increase of 5, 7%. The petrol price decreased by 22 cents (1, 6%) in June, the second consecutive decrease.
Is South Africa faced with stagflation? The economic reduction in the first quarter negative growth has led to the big recession debate, but the real challenge is that the South African economy is facing a stagflation trap.
* The inflation rate firmly hugged the 6% upper limit of the Reserve Bank’s target band over the past three years, while economic growth decreased to a below-par 1.9% last year in 2013 — and might not even reach that level this
In conclusion, regardless of Macropoland’s current economic condition, it is fair to say that it is all part of the business cycle. The business cycle has three parts: peak, trough, and peak. The peak is the date that the recession starts. In Macropoland’s case, the peak would be at the beginning of 1973, its trough somewhere between 1973 and 1974, and then its peak again at 1974. In the second scenario, Macropoland is either at its trough, where it is about to head up again because of its low inflation rate, or it is at its expansion, on its way to heading to its next peak.
Increased demand on a global scale due to increase in manufacturing across the world, opposite in U.
In the late 1960's and 1970's, accelerating inflation prompted the development of improved measures of prices and inflation-adjusted output.
A trend analysis of the unemployment rates, inflation, nominal GDP, and real GDP were tabulated and graphed as shown below. From the graphs, it is evident that inflation and unemployment rates have a non-deterministic curve and fluctuate over time. The progression occurs because inflation and unemployment can be caused by many other factors apart from the economic growth (Mankiw 58). For instance, changes in international market prices, advancements in technology, and the use of different methods of production.
as a result prices begin to fall. Because of the surplus of goods and falling
When Fed increased the bank deposits, it provides the bank with more capital which enabled people to make loans and investments. This process increases money supply, which also increases the spending rate, thus, as the spending increases more than the ability of an economy to produce goods and services, it caused inflation. This was clearly shown, when St. Louis Federal Reserve data on Fed deposit increased by 20 percent that was from April 2001 to 2005, April. But during the same period, other measures of money also increased rapidly. Good examples are; the monetary base increased to 28 percent, MI increased to 22 percent and the currency to 30 percent.
In this article by Eric Morath, Morath elaborates on the reasons why the Consumer Price Index (CPI) rose just 1% over the month of March. To be able to have an accurate analysis, there must first be an explanation on the definition of CPI and its role in contributing to the state of the economy.
This is where the total demand for goods and services in the economy exceeds the total supply. This happens after excessive growth in aggregate demand, and creates an inflationary gap. Excess demand in the economy drives up prices, and high prices mean that Suppliers want to produce more units of their product in order to make more money. To supply more, they must increase their production capacity, and the easiest way to do this in the short run is to increase the amount of labour they employ. This means that they are paying more wages, so people will have more disposable income, and hence there is more demand in the economy.
In conclusion, the effects of higher gas prices cutting back in vacation time, prices of everything is going up “inflation”, car companies making more efficient cars.
Inflation is defined as an increase in the expected price level and has been the signal for an improving economy, but it has also weakened an economy due to the unemployment it usually produces which usually hurts the Middle class the most. A healthy rate of inflation means an expanding economy due to higher tax revenues for the government and higher wages for businesses that are booming due to the high demand of their products. But if inflation surpasses of what is expected than employer will have to reduce wages to meet these new prices. When the Federal Reserve creates inflation most argue that this is robbing people of the money that they have saved because they have to use it due to the rise in prices. Printing
In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...
(a) Provide an example of how a government could use fiscal policy to achieve an increase
... could become a rage when the inflation rises to a very high level or when the demand of money cannot be met by the central bank of each and every country.
There are many factors that affect the economy, inflation is one of them. Basically inflation is risingin priceof general goods and services above a period.As we see value of money is not valuable for the next years due to inflation. Today every country has facing inflationary condition in their economy.GDP deflator is a basictool that tells the price level of final goods and services domestically produced in an economy.GDP is stand for gross domestic product final value of goods and services, Furthermore GDP deflator shows that how much a change in the base year's GDP relies upon changes in the price level. . Inflation in contrast, how speedy the average prices intensity is increases or changes above the period so the inflation rate define the annual percentage rate changes in the level of price is as measure by GDP deflator more over GDP deflator has a advantage on consumer price index because it isn’t only based on a fixed basket of goods and services. It’s a most effective inflation tool to identify the changes in consumer consumption and newly produced goods and service are reflected by this deflator. Consumer price index (CPI) is also measure the adjusting the economic data it can also be eliminate the effects of inflation, through dividing a nominal quantity by price index to state the real quantity in term.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.