Global economy has been changing significantly in past several decades which has been affected by the goods and services in the national borders leading to the movement of the country up and down in the international system economically. The economy of the country is strictly hit by two important factors that are: deflation and inflation. Deflation can be defined as the decrease in the price of the goods or services provided. In the other hand, inflation can be defined as the increase in the price of the goods and services. It is observed that the deflation increases the power of purchasing and increase the value for the money whereas the inflation cause the decrease in the economic power. Inflation plays the vital role for the fluctuation of the economy in the country that directly affects the economy of the world. It actually affects the various macroeconomics and microeconomics factor of the economy leading to various consequences. The most important consequences is unemployment.
The phenomenon of inflation has been described in three different views: a) general view, b) Keynesian view and c) modern view. According to the general view it has been described as the increase in the price of goods and services but decrease in the value of the money. According to Keynes, it is the states when there is increase in the goods and prices as well as increase in the employment. The inflation is caused due to the increase in the expenditure that causing the shortage of the goods and services. Modern view has stated inflation as the rise in price and it has adapted lots of theories such as the Philips curve theory and the structural theories regarding the demand pull and cost push inflation.
Philips curve theory describes the statistical relationship between unemployment and inflation. It shows the inverse relationship between unemployment and inflation. It was most popular during 60s and for decades it explained the relation between the unemployment and inflation. Philips curve has been criticized as unstable with the time being so the Friedman modified the curve with the natural unemployment that described the curve in the short run and long run.
There is the structural theories that describes the types of inflation: a) demand pull and b) cost push inflation. Demand pull inflation is the increase in the price due to increase in the demands of the goods and services but the supply is less than the demands. It has been influenced by the factor such as households, business, governments and foreign buyers. Demand pull inflation cause the less amount of goods and services with the lots of money. Generally, it is the inflation where the resources to obtain the goods and products are lot but the supply is not provided as demand. The increase in demands and less supply will lead to less product to more people and hence the price of the product will be increased. We can take an example of the housing prices of UK from 90s to 2000s the demand for the houses were so high but the supply of the house was not in the equal amount that has led to rise in the housing prices in the UK.
Cost push inflation occurs when there is decrease in the aggregate supply of goods and service due to the increase in the cost of the production. It is the condition when the prices rises as the cost of the input is higher than the output of the product. It has been influenced by the various factors such as labor, capital, land and entrepreneurship. There is high production of the goods and services but the profit margins cannot cover the increase in the wages of the employees so to cover the cost of the labor the prices of the good will increase.
There are various causes of inflation depending on the increase of aggregate demands and decreased aggregate supply. The increase in aggregate demands has been influenced by the increase in the money supply, increase in disposable income, expansion of the private sector and increase in the exports. These above things increases the monetary value that actually causes the increase in the demands. In order to cover the gap for the demands and the supply hence the inflation occurs. The decrease in supply is the most important cause of inflation. The factors that increases the supply such as shortage of factors of production, industrial disputes and international factors. The demands for the goods and services increases but due to the above factors for the decrease of the supply of the goods and services lead to the inflation.
The consequences of the inflation costs the global economy a big defect. It affects the various aspect of the individual company that directly hits the global economy. The consequences of inflation actually affects the monetary aspect, production and the society. The most important factor to be affected is the monetary aspect. The value of the money will be decreased but it has importance the money will be redistributed among the people of the country. The production is next aspect to be affected. The production is decreased as the input prices increases. When inflation occurs it causes high demands of the goods and services causing the high production. The cost of the labor and resources increases that substantially increases the price of the goods and services. It affects the government. In order to solve the problem for the inflation the government plans and execute to increase the taxation and revenues to budget the finance of the country under the situation of inflation.
The individual country will execute the various measures and its expectation to control the inflation. The main measures will be applied in the costs and aggregate demand. The reduction in the cost can be obtained by controlling the wages. The control in the wages will lead to less expenditure. The next main measure is reduction in aggregate demand. The government executes fiscal and monetary policy. In the fiscal policy the government reduces the spending and budgeting. With the reduction in the government spending there is increase in the taxation and revenues. The taxation is increased to cope with the consequences of the inflation. The monetary policy is also implemented to control the inflation. Under the monetary policy, the demand is reduced by reduction of money supply through the sale of government securities and the reduction of bank reserve requirements. There is increase in the interest and the debts. These are the remedies applied for the control of the inflation.
The most important consequences of the inflation is unemployment. Unemployment is a condition where people are jobless causing changes in the country economy. According to Philips curve there is the inverse relationship between inflation and unemployment. There are different types of unemployment such as structural, seasonal, cyclical and frictional. The unemployment leads to negative economical situation that leads to the deterioration of skills, increase in the debt and increase in the anti-social behaviors. The main way of reducing the unemployment is affecting the supply and demand aspect.
Inflation has been the most important factor that has affected the global economy. In the given case study it has discussed about the china price effect. China price effect is the important demand and supply side effects in the most powerful and rich countries that has made china the super power. China effect has caused inflationary consequences in the superpower countries such as the United Kingdom, United States of America, European countries. China supplies the other countries with low cost goods and products that is easily affordable than the local product which has high cost than the exported one. The raw materials, goods and product that has being imported from China has low price than other so the import is high. This leads to less productivity to the local goods and services. The local goods and products has to increase the price of its local goods and product to maintain the efficiency leading to inflation. This has made China one of the powerful industrial country in the world. Most of the articles has defined China price effect as both demand pull and cost push inflation based on the inflation due to aggregate supply or aggregate demand.
China price effect has played a vital role for making china a superpower country in providing best prices for the goods and services to other nations. China price effect can be considered as demand pull inflation. Demand pull inflation is increase in the price due to the demands as the supply is less. We can take example of the Chinese product and the Britain product, if the price of the Britain product is high the same piece of the product but Chinese made is cheaper consumer would prefer Chinese product rather than the pricey one. These leads to high sale of the Chinese product than the native one leading to more product imported from China. The developing countries such as China, India, Bangladesh produces the low cost product or the low cost raw materials that displaces the native raw materials and the product leading to China price effect. So China price effect can be the Demand pull inflation.
Inflation is the condition where there is increase in the price level of goods and services. There has been advantages and disadvantages of the inflation. The advantages of the inflation is it helps to counteract deflation. Deflation is the condition of fall in the prices, it makes people spend less as in the future the prices may get cheaper and increases the real value of the debt and reduction in the disposable income. It also helps to adjust the wages and the relative prices. The relative prices are important for the euro zone which has the single currency. It helps to adjust the value of the money. It helps to boost the economic growth. Inflation may have the advantages over the deflation but the major point is its drawbacks. Inflation damages the economic growth. It discourages the investment and long term economic growth. It reduces the value of the saving. The United Kingdom is the leading superpower country hit by recession in 2000s. It was the deep recession after the war. The manufacturing output declined by 7 % and it affected most of the economical sector such as bank and investment. The unemployment rate increased up to 8.1%. The unemployment decreases the gross domestic product (GDP). The economic condition of the country is on the edge leading to poverty and as government try to reduce the higher inflation, recession hits the nation. The government of the UK has taken various major for the prevention of the higher inflation that leads to recession. It has implemented a policy to gain confidence to sustain the recovery. It has worked in various aspect to sustain the recovery such as financial, tax, education, health, employment, equity, public governance, regional policy. The key policy it has recommended is ensuring the fiscal sustainability. It has focus to improve the educational outcomes with focus in skilled education and increase the quality of the vocational training and high quality apprenticeships positions. It has also focused in to increase efforts to make work pay and helps people to get jobs. It has also focused in the increase of efficiency in the tax system. It has prioritized the investment in innovation and infrastructure. The main ways to cure the inflation most of the country adopts fiscal and monetary policy. UK has adopted both the policy to sustain the recovery. It has completely involved all the major parts of the country such as tax system, education, employment and government to get relief from the higher inflation that leads the country to recession.
The controlling of inflation is the regarded as so important by government because higher inflation leads country into the recession. As recession hits the country it causes the great damage in finance and other important aspect of the country. Recession disables the economic growth of the country so that it has been the main focus for the government to control the inflation. For controlling of the inflation the government has to focus on the policy that involves all the aspect of the country including both financial and non financial aspect of the country. It focuses on the monetary and fiscal policy that helps to bounce back the financial status to normal.
Deflation is the condition where there is decrease in the price of the goods and products. It is the negative inflation. It increases the real value of the money which helps to buy more goods with the little amount of money. The deflation is the way to improve the condition of the inflation that leads to recession status of the economy of the country. Deflation is affected by various factors of which the most important are the aggregate demand and the supply. Deflation is caused by various factors such as change in structure of capital markets, increased productivity and decrease in currency supply. It has effect on the economy of the country. It causes various impact in economy such as reduced revenues, cutbacks on wages, changes on the spending of the consumers, reduced credit. It has been playing vital role for the cure of the inflation. There are various benefits of deflation. It has affected the large two groups of the economy that is the consumer and the business. It benefits the consumer by various ways such as reduce the debts and increase in the savings. It helps to increase the quality of the vocational training and skills that helps to fond and retain the job that helps to feel security in the job. It has impact on the business as well. It is the counteract part for the business, consumer gets the positive part as business gets the negative part. Business has a positive part that is it can prepare for the worst. It can pre plan the strategy to survive in the deflative stage, do careful planning in the production, investment and inventory, re-evaluate the investment, cost and production. The business can pal the strategy to prepare the condition that helps it to survive in the condition. The deflation is the condition where the value of the money increases. The large amount of the goods and product can be obtained from the same amount of money.
Deflation has such a good impact on economy of the country but on the contrast it has disadvantages as well. The long term deflation has bad impact on the economy of the country. The main disadvantages is the monetary policy is tighten that means the low wages and increase in the tax and revenues.
United Kingdom got the advantages during the deflation. The fuel prices from the supermarkets decreases during the deflation period and the prices for the electricity and gases has been decreased as well. There has been competition between the sellers for the prices of the petrol prices to maintain the trust of the consumer.
Deflation is the condition where the prices of the goods and the services decreases and this is the phase where the savings increases and real value of the money increases. This is the time where the country and the economy takes the peak to recover from the inflation that led to recession. It helps to maintain the economy of the country.
Stability in the economy is not possible for the company as the balance between the stability may fall to deflation condition to rise to inflation. Too deflation or inflation condition is not good for the economy of the country. High inflation may lead to the recession state of the country that damages the economy of the country. China has been established as the superpower country that has taken advantage of the inflation and deflation in the country where it exports and imports the good and the services leading to china price effect. In this essay, deflation can be taken as a solution to cure inflation but too much deflation may lead to poor condition of the country as well but inflation can be cure for inflation but too much inflation leads to recession. The main way to tackle both the situation is stability in the economy is the best way.
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After reading this tutorial, you should have some insight into inflation and its effects. For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation.
Some points to remember:
- Inflation is a sustained increase in the general level of prices for goods and services.
- When inflation goes up, there is a decline in the value, or purchasing power of money.
- Variations on inflation include disinflation, deflation, hyperinflation and stagflation.
- Theories as to the cause of inflation are up for debate. Some common theories include demand-pull inflation, cost-push inflation, and monetary inflation.
- When there is unanticipated inflation, creditors lose, people on a fixed-income lose, menu costs go up, uncertainty reduces spending and exporters aren't as competitive.
- Lack of inflation (or deflation) is not necessarily a good thing and can lead to destabilizing deflationary spirals.
- Inflation is measured with a price index.
- The two main groups of price indexes that measure inflation are the Consumer Price Index and the Producer Price Indexes. The GDP- and Price-deflator are also used.
- Interest rates are decided in the U.S. by the Federal Reserve. Inflation plays a large role in the Fed's decisions regarding interest rates since it uses inflation-targeting as a policy.
- In the long term, stocks and precious metals are good protection against inflation.
- Inflation is a serious problem for fixed income investors. It's important to understand the difference between nominal interest rates and real interest rates.
- Inflation-indexed securities offer protection against inflation but offer low returns.