• 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...


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.


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.


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. Budget 2004-05 and Economic Analysis of Pakistan

    GENERAL PUBLIC SERVICE The details under General Public Service are given in the Table. (Rs.in Million) 2003-2004 2004-2005 Classification Budget Revised Budget GENERAL PUBLIC SERVICE 377926 448430 423836 Executive & Legislatives Organs, Financial l308440 377216 349516 Superannuation Allowance & Pension 37625 40995 42533 Servicing of Foreign Debt 39490 44945 44039

  2. 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.

  1. What ended hyperinflation in Germany, Austria and Hungary in the 1920s? Do the facts ...

    The new established independent central bank began operations on 1 January 1923 in order to stop large deficits and stop financing deficits by printing money.

  2. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    Graph 5 This shows the same clear signs of the recession that hit the UK in the early 1990's. From the end of 1990 until half way through 1992 there was negative economic growth in the UK. From there the sudden growth from the end of 1992 up until mid

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

    Therefore, this type of workers actually helps the country to fill the job vacancies in the lower level jobs. On the other hand, for skilled labours, they will mostly find jobs in blue collar and white-collar industries which require qualifications.

  2. Why does smoking lead to an external cost?

    elasticity of demand is the responsiveness of change in demand to a change in price. Different goods and services have different elasticities of demand based on a number of different factors. One factor is the availability of substitutes. If a good or service has a large amount of substitutes for

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