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Inflation - Essay Example

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The concept if inflation is indeed an important component considering how it influences many aspects of life. The paper seeks to delve into the causes of inflation in order to illuminate the factors which lead to the persistent increase in the prices…
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Inflation
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Download file to see previous pages The concept if inflation is indeed an important component considering how it influences many aspects of life. The paper seeks to delve into the causes of inflation in order to illuminate the factors which lead to the persistent increase in the prices. 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). Inflation usually causes money to lose its value. This comes about in that as inflation increases, currency only buys a small percentage of goods compared to what it used to when there was no inflation. This happens due to the increase in the money supply which is measured by the producer price index and the consumer price index over time. When inflation rises in an economy in higher rates, it leads to adverse effects in the economy. However, mild inflation in the economy can lead to positive effects such as creation of employment. To keep the rates of inflation low, monetary authorities usually central banks are given the responsibility of controlling prices. This paper will discuss various causes of inflation, types and the effects that it has in the economy. Causes of inflation One of the causes of inflation is cost-pushing. This is a case where companies incur a lot of costs in running their operations. Hall states that these higher costs are usually brought about by workers or trade unions pushing for their wage increase (163). When they receive the increase, the impact is felt by the consumer in that it transfers the cost to the consumer by increasing the costs of goods and services. This tendency is characterized by an increase in wages irrespective of the productivity. Productivity normally remains the same which leads to the increase in the prices of goods and services in order to counter the effect. When a lot of firms increase wages in the same manner and pass the effect to the consumer in terms of high prices, this the leads to inflation. Another cause of inflation is demand-pull. This is a case where the overall demand exceeds supply and is normally brought about when an economy experiences full employment. The demand can be in terms of goods and services or it can as well be the demand for labor. When the demand exceeds supply in the market, the suppliers have a tendency of increasing the prices of commodities. This is because of the surety that their goods will sell at whichever cost due to scarcity. If the supply of the goods remains low over a period of time, this leads to inflation because the prices will keep on getting higher and higher. This can also portray itself where employers demand more workers than what they can get. In turn, they increase their salary in order to attract more labor which leads to inflation in the long run. Exchange rate is another cause of inflation. This comes about when a nation has increased exposure to the foreign market. It is one of the critical factors that determine the rate of inflation. If the rate of exchange suffers, the local currency loses value to the foreign currency. This leads to the foreign goods becoming expensive to the local consumers which simultaneously lead to the local goods becoming cheap to the consumers in the overseas markets. In simple terms, the import price gets higher than the export price which leads to inflation. National debt is another cause of inflation. If a country has a higher debt, then this can accelerate the levels of inflation to higher rates. This leads to inflation because, if the debt increases, the government of the country is left with two options; to either print more money to pay off the debts or to increase the taxes which will lead to higher revenue hence provide means of settling the debt. Increase in tax is passed down to businesses that in turn increase ...Download file to see next pages Read More
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