Term Paper on "Macroeconomics Inflation, as a Sign"

Term Paper 5 pages (1568 words) Sources: 1+

[EXCERPT] . . . .

Macroeconomics

Inflation, as a sign of the disequilibria in the economy, is proportional to their magnitude; its level is higher as the gap between the total demand and supply widens.

The price increase, as an expression of inflation, may take values which range from 0.5-1% to values with two or three figures per year. This is the case of "rampant" inflation, which manifested itself in the last decades in countries such as Italy (the 70's), several countries from Latin America (the 70's and 80's), or Israel, at the beginning of the 80's. At the beginning of the 90's, some countries in a "transition phase" faced rampant inflation. Although inflationary pressures were high, the economies of these countries continued to function; there were even situations of remarkable economic performances, such as the case of Brazil (the 80's) and Turkey (the 90's)

When inflation brings an annual price increase written with three or four figures, the phenomenon is called "hyperinflation." There is a conventional limit for such a type of inflation i.e. A monthly price increase of more than 50%, which corresponds to a 13.000% per year rate.

Known cases of hyperinflation are rare; the cases of Germany, Hungary and Brazil are mentioned in the economic literature.

1. In Germany's case, during 1922-1923, the prices went up over ten billion times. The effect was the diminishing of the monetary base, in real terms, by a factor of 30. Wages, in real terms, fluctuated by more than 33% from month to month.

2. Hungary went through two periods of hyperinflation, during March 1923-February 1924 and during august 1945-july 1946. Similar cases were recorded in Poland, Yugoslavia and the Soviet Union, at the beginning of the 90's.

3. In Brazil, during 1989, prices grew by 1650%, which corresponds to a daily increase of 0.78%.

The fact that prices soar is just an effect of inflation. The other is the increase of the quantity of money available in the economy. High inflation rates are often associated with important monetary supply increases. The inflationary phenomenon, which grew in time to gigantic proportions, presents, in the last 50 years, two characteristics:

Prices rises were extremely diverse throughout the economy, significantly varying from sector to sector, which indicates a disproportionate increase in consumption.

Inflation is the sign of monetary depreciation

It's not exactly scientifically accurate to associate general price increases with inflation. It would probably be better to say that price rises are accompanied by inflation and a depreciation of the value of money. This depreciation is based on a fundamental truth: if a monetary unit values less, than it will be available in a greater quantity. Therefore, price increases are caused by an abundance of means of payment; if a price indicates the relative value of a product, than the price index is relevant for the purchasing power of the national currency.

Inflation, as the main form of manifestation of the monetary disequilibria, presents itself in various forms, depending on the causes that have generated it.

Inflation caused by demand is generated by the disequilibria that manifest themselves on the market of products and services, between the demand for goods and the global inelastic supply. The effect of such disequilibria is the increase of the prices of goods and services, based on an increase of the monetary supply.

The causes that determine the quantity of money to go up are tied to the surplus of the balance of payments, to excessive monetary creation and to modifications in the relation between savings and consumption. The lack of elasticity in the supply is caused by the insufficiency of the stock of goods or even by the inexistence thereof, and may be temporary or on a long-term. Such disequilibria manifest, initially, in the frame of an economic sector, extending themselves, by specific means, to the level of the entire economy. These means are interindustrial relationships, the increase in incomes and the demand for goods and services, the "contagious" effect of income rise and the generalization of price rises.

Inflation caused by costs is generated by the demands of unions for salary increases in particular areas of activity where productivity is not on an ascending slope. The consequence of such modifications in salaries is the modification of the price of goods and services products by those particular workers and, afterwards, the generalization of the phenomenon. The fundament for the price increase is the difference between the evolution of productivity and the evolution of salaries. Statistically speaking, it is easy to prove that, if productivity goes up by 5% percent and salaries by 9%, the prices will rise by 4%. If the salaries' level is surpassed by the prices' level, the corresponding difference is transformed into profit

Imported inflation is the result of the participation of national economies in the international trade fluxes of equity, goods and services and is caused by the imports of products of a particular country. The variation of foreign exchange rates in an unfavorable way is, for importers, a way to generate the inflationary process, since production costs rise due to the pressure of "imported" prices.

Structural inflation is determined by the strategy, adopted in some countries, of accelerated development and fast economic growth, which implies the intensive mobilization of the means of production. Disequilibria are being created, as some sectors find themselves in decline while others are growing rapidly. Financing new activities is generally achieved by using public funding and credits obtained form banks, a situation which leads to heavily increased monetary fluxes in the economy and to a rise in demand.

The inflationary process is emphasized and sustained by fiscal and social duties, corresponding to the new activities, which affects the objectives of certain social categories. This way, structural inflation is continued by inflation through income.

At the core of structural inflation one can find such factors as the support offered to specific economic sectors and the rigidity of the economy, which influences heavily the procurement of equity, the supply with material resources and labor utilization.

Other criteria used to classify inflation are as follows:

Depending on expectations, inflation may be anticipated and not anticipated. The first form is characterized by the fact that it is awaited and received by every participant on the market, while the second form causes serious problems, especially for savings, labor and production, which affects the general equilibrium.

Depending on the functioning of market mechanisms, we could speak about open and repressed inflation. In the case of open inflation, the economic mechanism is based upon fixed prices and is manifested in the general background of an insufficiency of goods, services and labor. Repressed inflation is the result of government intervention in the increase of prices and salaries; the intervention consists in applying "countermeasures," thereby reducing inflationary tendencies.

Traditional anti-inflationary policies consist in blocking (or freezing) prices, applying budget and fiscal policies, limiting credit and applying specific income policies.

Blocking prices is a direct method of fighting against inflation and consists in various measures designed to forbid price increases for particular goods and services, during a determined time period. Such a measure is a direct and quick action, compared to other measures, but long-term efficiency is low. The most important problem is that the economy has to "come out" of the price-blocking phase; consequently, important price rises make their appearance.

The risk is higher if the period during which the measure is applied is longer than necessary. Freezing prices never caused the diminishing of inflation, but impeded its development in an uncontrolled way.

Fiscal and budget policy measures aim at reducing global demand, by intervening directly on its components. Two instruments are available, as follows:

either the government reduces public spending, or the fiscal pressure is increased, or incomes diminish, thereby reducing the expenditure of the private sector.

This type of… READ MORE

How to Reference "Macroeconomics Inflation, as a Sign" Term Paper in a Bibliography

Related Term Papers:

Inflation Unemployment and Phillips Curve in China Dissertation

Inflation, Unemployment and Phillips Curve in China

Research particularities

Inflation, unemployment and their definitions

The problem of inflation

The definition of inflation

Measures of inflation

How inflation is measured

Global… read more

Dissertation 50 pages (14932 words) Sources: 40 Topic: Economics / Finance / Banking

---

Macroeconomics Research Paper

Macroeconomics

Over the last several years, the economy has been through a number of different challenges. Part of the reason for this, is because of shifts that have taken place… read more

Research Paper 3 pages (1026 words) Sources: 1 Topic: Economics / Finance / Banking

---

Creative Powers it Is a Fact Term Paper

Creative Powers

It is a fact that the society in which we live will never be truly free in all areas of life. Indeed, it has been suggested by some… read more

Term Paper 9 pages (2842 words) Sources: 0 Topic: Sociology / Society

---

Fiscal Policy Macroeconomics Questions: Uncertainty Thesis

Fiscal Policy

Macroeconomics Questions:

Uncertainty is the greatest watchword of the current economy. As American staggers into the 18th month of its recession, the dramatic 'bailout' spending of the Obama… read more

Thesis 4 pages (1255 words) Sources: 1+ Style: APA Topic: Economics / Finance / Banking

---

Role of Private Investment on Economic Development in Iraq Literature Review

Role of Private Investment on Economic Development in Iraq

Private investment in developing countries

An overview on early Empirical studies

In 1980s, the developing countries encountered some increment in their… read more

Literature Review 40 pages (14411 words) Sources: 45 Topic: Economics / Finance / Banking

---

View 100+ more related papers  >>