Thesis on "Inflation Economy Experts Have Not Agreed"

Thesis 5 pages (1533 words) Sources: 5 Style: Harvard

[EXCERPT] . . . .

Inflation

Economy experts have not agreed upon a generally accepted definition

of inflation. Opinion on how inflation is generated and how it manifests

are numerous, determining the existence of numerous definitions.

Definition #1: loss of purchasing power of money caused by growth of

the amount of money in circulation and reflected in a rise of prices

without a proportionate increase in value of the things purchased

(Webster's, 2008).

Definition #2: a persistent increase in the level of consumer prices

or a persistent decline in the purchasing power of money, caused by an

increase in available currency and credit beyond the proportion of

available goods and services (The American Heritage Dictionary, 2008).

Definition #3: the overall general upward price movement of goods and

services in an economy, usually as measured by the Consumer Price Index and

the Producer Price Index (InvestorWords, 2008).

The working definition that will be used in this paper is represented

by the definition provided by the American Heritage Dictionary.

Inflationist processes represent realities that create the object of

preoccupation of all categories of economic agents, of ordinary people, of

authorities, and of specialists. Inflation is a component of everyday life

and of the economy's functioning mechanism. As an economic phenomenon,

inflation is perceived as a general increase of goods' prices and a

reduction of the monetary unit's purchasing power.

Even if the prices do not increase in absolutely all categories of

goods, the process is still present in the great majority of goods. There

may be increases in certain categories of goods that do not necessarily

represent the expression of the inflationist process. For example, certain

goods may experience an increase in their intrinsic quality that consumers

perceive.

In other cases, temporary shocks, smaller or more important, may

intervene on the market's equilibrium or on the supply and demand of

certain goods. After a short period of time the causes that have generated

the shock disappear, and the effect is eliminated, prices returning to

their previous level.

Despite these delimitations, inflation has manifested intensively or

intermittently for dozens of years. After World War II, inflation became a

persistent reality, durable, but with different intensity in every economy:

rebel, extremely dynamic, causing worries in underdeveloped economies, or

slow, kept under control in modern economies. Inflation is a macroeconomic

unbalance between money and goods.

Although inflation is perceived by economic and social participants

with different intensities and meanings, there are institutionally

established formulas for calculating its level and evolution. The generally

accepted index for calculating inflation is the Consumer Price Index (CPI).

In the United States, for calculating the CPI specialists take into

consideration 364 different categories of goods produced by 21,000

companies in 91 geographical areas. In October, the CPI decreased 1% (BLS,

2008).

Inflation is a complex economic phenomenon that has generated numerous

debates between experts, and preoccupations for practitioners and the

population regarding the causes that generate inflation and the mechanisms

that support it.

There is currently no generally accepted theory of inflation. The

causes of the inflationist process are numerous, including economic,

psychological, social, political, internal, and external causes induced

through the international economic relations mechanism and through the

increasing interdependencies between national economies.

In certain conditions, inflation is generated by the demand, and in

others it is generated by the supply. In some cases, inflation has been

determined by the contradictory evolution between the supply and demand, or

by monetary politics measures that were insufficiently correlated with

economic realities.

Unjustified increase of financial incomes of certain categories of

economic agents, state budget deficits, increased costs, depreciation of

the national currency, or the reduction of supply with no economic

foundation can determine, amplify, and maintain the inflationist process.

However, the essential feature of modern inflation is the fact that it

has an internal dynamics and that it is difficult to stop once it has

emerged. Experts call this inertial, anticipated, or fundamental inflation.

This type of inflation is anticipated by economic agents and taken into

consideration when signing private contracts and official agreements.

Therefore, given the fact that it is integrated in the economic

actions and behaviors of individuals and officials, the anticipated

inflation rate can be taken into consideration for the future effective

inflation rate that has the tendency to last for as long as a shock will

not determine it to increase of to diminish.

There are numerous partial causes that combine and generate the

inflationist process, as an unbalance between money and goods, consisting

in excessive monetary supply in relation with the volume of goods subjected

to transactions. Basically, this situation reflects the existence of a

total demand excess in relations with the total supply, an unsatisfied

solvable demand.

From the perspective of the processes that determine it, inflation is

traditionally segmented as: inflation through demand, inflation through

costs, structural inflation. All these cases are characterized by a

supplementary global demand exceeding the global supply, but with different

explanations in each of these inflation types. They are identified by a

specific evolution of the GDP. The GDP usually increases in the case of

inflation through demand, it diminishes in the case of inflation through

costs, and it can be stationary or it can follow a reduction tendency in

the case of structural inflation.

Inflation through demand is based on an increase in the global demand

that takes place suddenly or gradually in combination with an inelastic

supply. In other words, when demand increases as a result of a certain

shock, the price and quantity increase, because the balance must adapt

through prices and through quantities.

The premise of the inflation through demand is that the monetary mass

increases faster than the GDP, or that the incomes of economic agents

increase more intensely than the goods supply. Considering these aspects,

Milton Friedman stated that the inflation is always a monetary phenomenon,

the root of this phenomenon being the monetary excess.

In order to have an inflationist process, two main conditions are

required: the general increase of prices, and its long duration. The

circumstances that determine the length of this process are numerous. They

depend mainly on intentional mechanisms designed to repeatedly more money

than necessary. This situation generates supplementary solvable demand,

which means that increasing prices is the immediate solution for balancing

the markets.

The elasticity of production, especially production of durable goods

and capital, is decisive for the inflation state. If the supply is elastic,

the indirect mechanism will not generate inflation. If the production is

inelastic, it means that the inflationist process has emerged.

Another factor responsible for generating or preventing the

inflationist process is represented by the economic agents that gain the

excessive money supply in circulation. If the money supply increase would

go to producers, it means the investments are stimulated, GDP increases,

and the possibilities of the inflationist process are reduced.

If the money supply increase would go to consumers and speculators the

prices increase effect is inevitable and the inflationist process emerges.

The inflation through costs is based on the connections that exist at

costs level, the behavior of entrepreneurs, and the efficiency of using

resources. The working hypothesis is that the level of unitary costs

receives a growth impulse. The causes are numerous: depreciation of the

rate exchange, which increases the prices of imported production factors,

favoring the CPI increase, the reduction of certain markets.

Inflation through costs can also emerge because of governmental

policies, when the government is interested in maintaining a high demand,

by practicing expansive monetary and fiscal policies. This way, the global

demand that is artificially supported by the authorities, increases

potential production, which leads to inflationist reactions of

entrepreneurs.

The structural inflation assumes a severe economic situation in which

demand and supply modify in contradiction: demand increases, and supply

decreases. Although it can be considered a continuation of the previous

types… READ MORE

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