• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

To What Extentis Inflation a serious Economic Problem.

Extracts from this document...

Introduction

To What Extent is Inflation a serious Economic Problem Before considering whether Inflation has serious Economic Problems, we have to get to grasp what it exactly is. Inflation is defined as a sustained general rise in prices in the Economy. Obviously the government can't measure every single price change for every single good in the economy, so therefore they take a basket of goods and by using a price index measure a change in it. The basket of good has a representative range of goods and services and it needs to be recorded at a regular basis, to measure how inflation is changing. The UK government currently use the RPI (Retail Price Index) as a measure, which measures, in theory, each month, 150 000 prices for 600 items. Surveyors are sent out to a random set of households and measure it on the same day of each month to record a fair reading. The goods and services in the basket of goods are also weighted, which means the goods and services which use the most household spending are more important than the goods and services which use the least and therefore the larger proportion of total household spending has the largest weight. ...read more.

Middle

Inflation increases costs of production and creates uncertainty. This lowers the profitability of an investment and makes the company less willing to take the risk associated with any investment project. This again slows down long-term growth and also means less long-term employment as no one is required to use the investment. High inflation hampers long term planning. With all these costs of high inflation it must seem apparently clear that low inflation is what the government want. Yes is the answer, but it doesn't mean that low inflation is perfect. It has costs as well as high inflation. Too low inflation is not only a disincentive for production decision but it can also delay consumer spending in anticipation of further fall in inflation and dampen demand at a time when its revival is critical for triggering the upturn. Low inflation also conveys inflexibility to nominal wages and labour markets, causing higher unemployment and deepening the recession. In a period of falling inflation the ability of firms to make adjustment in real wages is severely constrained and this leads to inefficiency in the allocation of resources and a rise in unemployment. However in general low inflation is good to the economy for the following reasons. ...read more.

Conclusion

When deflation happens workers are going to lose their jobs and wages will be cut. This high unemployment will have to be countered by the government using time and resources. Also as prices have gone down there is less incentive for businesses to produce due to smaller profits, so production will fall and the GDP will fall (Less growth). Inflation doesn't just affect the economy if it is too high or too low; it also affects it if it is not anticipated. Much inflation is unanticipated and households, firms and government are uncertain what the rate of inflation will be in the future. When planning they therefore has to estimate as best they can the expected rate of inflation. To mitigate the effects of inflation the government uses a process called INDEXATION, which allows inflation to be anticipated. This gets rid of some of the costs of inflation however causes some. The indexation builds in cost structures, such as wage increases, which reflect past changes in price. I have looked at a range of aspects involved with inflation and what the costs to the economy are when the scenarios are different, hyperinflation, sustained low inflation etc. and I conclude that inflation will always have some costs if it is both high and low, but higher inflation, which could lead to hyperinflation has more costs to the economy and therefore causes a greater economic problem. Jai Patel ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    To what extent is inflation a serious economic problem.

    5 star(s)

    For example if a new legislation came out on a higher minimum wage the cost of production will increase. These higher wage demands have no link to productivity increasing and so the total cost for firms will increase. The cost will be passed on to the product or service, to be paid by the consumer and so inflation increase.

  2. Peer reviewed

    Discuss whether deflation or inflation is a more serious problem for the economy

    3 star(s)

    Some times an economy can experience the 'right kind of deflation'. The right kind of deflation involves lower prices through increased productivity and better technology. This can be an economical advantage because the development of new technologies increased economic activity and can help grow the economy.

  1. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    Thus, there will be less jobs in the domestic market and less growth. There are two views of controlling inflation - the Monetarist view and the Keynesian view. The reasoning behind a particular type of inflation will influence the policy measure that is used to control inflation.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    Furthermore, foreign workers do not ask for many things but just a pay and a place to shed themselves. Hence, it is easier for employers to hire them. Besides, foreign workers are more obedient than local workers and this also explains why employers prefer foreign workers rather than the local ones.

  1. Why does smoking lead to an external cost?

    However, if interest rates are lower in the UK than any other country then people will choose to invest abroad, thus reducing demand for the pound, leading to a fall in the value of the pound. If the UK inflation rate is higher, investors are less likely to prefer the

  2. Pakistan is in the grip of a serious energy crisis that is affecting all ...

    thus raising the demand supply gap to 5000 MW: HIGH COST OF FUEL The cost of crude has increased from 40 $ to 140 $/barrel s last couple of month it means the generation from thermal units are costing exorbitant price.

  1. Extended Project - Microcredit

    Presentation * Projector * Laptop Section Four Contingency Plan Firstly, the amount of information available is vast, and therefore I must choose the most accurate and reliable sources to use, as well as speed reading sources and isolating and selecting useful information and statistics.

  2. Compare and contrast the various methods of dealing with the problem of monopoly.

    - Ofcom (merged, previously Oftel) are a working example of this. They are the regulating body for the communications industry, covering telecommunications. Previously, before deregulation occurred, there were two main dominant firms: Telewest/NTL (Now Virgin Media), and British Telecommunications. If there was no regulatory body in place, it would have

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work