Inflation is an economic phenomenon in which prices of goods and services increase gradually over a period of time. It is one of the most important economic problems facing by majority of the countries at present. …
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Inflation is an economic phenomenon in which prices of goods and services increase gradually over a period of time. It is one of the most important economic problems facing by majority of the countries at present. Even developed countries and rapidly emerging countries are not free from the problems generated by inflation. China is the most rapidly developing country in the world at present. Yet, “China's inflation rate hit a 10-month high in February, as Lunar New Year festivities drove up food prices. Consumer prices rose 3.2% from a year earlier, with food prices up by 6% (China inflation rate hits 10-month high in February, 2013). This paper analyses the reasons of inflation in China. Causes of inflation in China Even economists are not unique in their opinions about the reasons of inflation. In other words, there are plenty of reasons for inflation in a country. However, two economic theories; Demand pull and cost push inflation theories explain the reasons of inflation comprehensively. Demand-pull inflation occurs when demand for a good or service increases so much that it outstrips supply. As demand increases, sellers start selling out of the product, and frustrate potential customers. Their next step would be to produce more. However, if supply is constrained, their next step would be to raise prices, creating inflation (Amadeo, 2013). Demand pull inflation is illustrated in the figure given below. Demand pull inflation is a case in which too much money available in the market whereas the availability of goods or services is less. In other words, in economies with demand pull inflation, demand for goods and services will be increased whereas the supply decreased. As a result of that price will be increased. (Monetary Policy - Inflation – Causes, 2012) Demand pull inflation occurs mainly in growing economies. Since China is one of the most rapidly growing economies, demand pull inflation occurs quite frequently. “China’s broad money supply more than doubled in four years, reaching 97.42 trillion yuan (US$15.66 trillion) by the end of 2012, according to central bank figures. Economists blame the unprecedented growth in credit for the inflation and asset bubbles” (Zitan, 2013). Centran bank of China is printing excessive currencies in recent times in order to pump more money into the market and to increase the economic activities. As a result of that asset bubbles are creating major industrial sectors, like real estate industry in China. Asset bubble is an economic phenomenon in which the prices of assets increase sharply. In other words, asset bubble increases the prices of commodities beyond its actual or realistic price. When prices of a commodity increases beyond its actually value, the possibility of sudden collapse of its value cannot be ruled out. In short, when the government pumps more money into the market the value of the commodities increases beyond its actual prices and thereby causing inflation. Credit or money supply is essential for a country’s economic growth. It has direct relationships with the gross domestic product (GDP) of a country. Economic activities in a country can be sustained only with the help of adequate money supply. However, excessive money supply brings more harm than good. Money supply is usually keeps a ratio of 1 to 1.5 with GDP in developed countries. However, in China’s case, this ratio reached an all-time high 1.88 in 2012 (Zitan, 2013). In terms of credit creation, no country seems to be anywhere near to China. As a result of that asset bubbles or economic bubbles are common in China. Loans made by Chinese banks in recent times are extremely higher compared to that in the past. Thus, Chinese people are getting plenty of money in their hands for purchasing goods and services. When the purchasing abilities of the people increase, economic activities will also be increased. At the same time, price hikes will also take place as a result of the pumping of more money in to the market. Cost push inflation
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China’s Inflation and related factors. This excerpt is from Dow Jones Newswires magazine. It considers the rise in inflation in China with connections to variations in GDP rate. The article even highlights the factors that are attributed to such rising inflation and GDP.
Types of inflation Demand-pull inflation This type of inflation occurs when the demand overwhelms supply, it makes the prices of commodities, and or services to rise. The increase in demand with respect to low supply will consequently lead to excess demand.
Inflation and its Causes
Inflation has been one of the major subjects that have been addressed in the economic world and in order to properly understand it, one has to delve into all the aspects that are related to it. The paper will also look into the effects that inflation has on the economy and by extent the society as a result as it attempts to discover ways in which this situation brings about a difference in the way individuals live their lives.
In the same way, it will provide an analysis into some of the effects of inflation while focusing on the different types of inflation arising from different economic situations. Introduction Inflation is described to be a rate in which the overall price of goods and services is increasing while the purchasing power decreases in an economy (Nicholson 57).
In effect, inflation is the loss or the diminishing of value of money in a given economy (Blanchard 45). In plain language, inflation is the instance where goods and services get expensive or the phenomena where people complain that the price of commodities is rising.
Running Head: ABBREVIATED TITLE OF YOUR CHOICE (all caps) Will China Revalue its Currency Introduction China has revalued its currency at many occasions since the beginning of economic reforms in 1979.
The main cause of inflation is the increase in quantity of money supplied in the economy. The costs of inflation to the public include menu costs, shoeleather costs, inefficient allocation of resources, redistribution of income, uncertainty, and distortion of tax payments.
This research will begin with the statement that inflation is a situation when the prices of goods and services increase very rapidly but the availability of the goods and services remain same. Poor people cannot purchase everything because of rising in prices, so the rate of poverty also increases in the affected economy of the inflation.
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