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

    In 2007, major dailies had mentioned statements by authorities saying that 20 percent of crime committed here are by foreigners. In year, police statistics was reported to show that less than 3 percent of crimes in this country are committed by foreigners.

  2. Extended Project - Microcredit

    Project Proposal Form 15/12/08 Complete project proposal, containing all relevant information and rationale. Kept to this deadline, although had to change rationale and title various times due to changes in title. Introduction 12/01/09 Complete Introduction encompassing what I plan to do in the project.

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

    As explained in the theory section, changes in aggregate demand have large effects on the levels of inflation due to the monetarist transmission mechanism, as explained in diagram 2, so increased consumer confidence, and hence increased consumer spending should lead to increases in the inflation unless they are controlled by either government or the MPC depending on when they occurred.

  2. Budget 2004-05 and Economic Analysis of Pakistan

    67560 70108 74806 Workers Profit Participation Tax 3000 3000 4000 Foreign Travel Tax 2500 2088 4216 Petroleum Development Levy 46135 46400 47506 Gas Development Surcharge 15000 14226 15023 Arrears (Surcharges) 0 3774 2777 Airport Tax 925 620 1284 TOTAL 577560 580108 65480 NON TAX REVENUES (Rs.in Million)

  1. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    and this is illustrated in the following diagram: This new, higher level of demand my happen for many reasons Atkinson, B. and Miller, R., (1998, p378) tell us that 'The high level of demand may originate from consumers, from firms, from overseas or from the government'.

  2. Economics - House Prices.

    It has many original features, central heating, and a new slate roof. There is a small front garden and a 30ft walled west-facing rear garden. The ground floor has a 25ft through living room with original working fireplaces, sash windows, cornices and shutters.

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