The Embeddedness Of Economic Markets In Economics - Research Paper Example

1 The Embeddedness Of Economic Markets In Economics Market is a term which has two meanings. First a general market denotes the theoretical mechanisms through which supply and demand deal with each other and business transactions are made. Reference to markets meditates ordinary experience and the spots, processes and institutions in which exchanges occurs (Callon, M. 1998, p.2). Mention to actual markets can display capitalism not as a total force or fully surrounding mode of economic activity, but rather as “a set of economic practices scattered over a landscape, rather than a systemic concentration of power” (Gibson-Graham, JK 2006, p.2) Discussion about inflation and the two famous theories of inflation is carried out in this paper. The two different theories of inflation are demand-pull inflation and cost-push inflation. According to W.Marget inflation is defined as “. There have always been economic illiterates to cry that the difficulty was due to a ‘shortage of goods’, than an expansion in the quantity of money. . .” (Arthur Marget, W., The Theory of Prices, Prentice-Hall, Inc., 1938, p. 93). Rising consumer prices resulting from the demand for goods and services exceeding supply. Demand-pull inflation is likely to enhance corporate profits because businesses are able to increase the prices they charge without corresponding increases in their costs. Rising consumer prices caused by businesses passing along increases in their own costs for labor and materials. Cost-push inflation does not necessarily result in rising corporate profits because businesses may be unable to pass through all of their cost increases. 2 Name of the student: Hamad Alromaithi Name of the professor: Dr.Martin H. Saboo Class: ECO 201,SEC.006 Abstract: Inflation is a key macroeconomic variable, in particular for monetary policy. In modern macroeconomic models they are driven by random shocks which feed through the economy in various ways. Models differ in the nature of shocks and their transmission mechanisms. This is the common theme underlying the essays of this thesis. Two theories demand-pull and cost-push are also examined in this essay. 3 Introduction: When the universal price level increases, each unit of currency purchases less goods and services. A principal measure of common price-level inflation is the common inflation rate, which is a percentage change in a general price index, normally the Consumer Price Index, over time (Mankiw Gregory, N, Macroeconomics (5th ed.), Worth 2002, pp. 22-32). Economists normally are of the opinion that high rates of inflation and hyperinflation are the outcome of a disproportionate growth of the money supply. (Robert Barro and Vittorio Grilli, European Macroeconomics, Macmillan, Ch. 8, 1994, p. 139). Factors which determine low to moderate rates of inflation are more deviated. Low or medium inflation may be assigned to fluctuations in real demand for goods and services, or alterations in accessible supplies such as during scarcities. The same is true with the growth in the money supply (Mankiw, N. Gregory, Macroeconomics (5th ed.), Worth 2002, pp. 81-107). On the other hand, the compromise view is that a long continuous period of inflation is induced by money supply developing quicker than the rate of economic growth (Abel, Andrew; Bernanke, Ben, Macroeconomics (5th ed.), Pearson 2005, pp. 266-269). Today, majority of the economists support a low steady rate of inflation (Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists, Econ Journal Watch, Volume 4, Number 1, January 2007, pp 46-5). Low when opposed to zero or negative inflation may decrease the cruelty of economic recessions. This can 4 happen by modifying the labor market to alter more quickly in a downturn. It can do so by sinking the risk that a liquidity trap forestalls monetary policy from steadying the economy. The chore of maintaining the rate of inflation low and stable is normally given to monetary authorities. Generally, these monetary agencies are the central banks that check the size of the money supply by setting of interest rates, via open market operations, and through the setting of banking reserve requirements (Taylor, Timothy, Principles of Economics, Freeload Press, 2008, p 632). Measures of Inflation: Inflation is normally measured by computing the inflation rate of a price index. The Consumer Price Index is normally taken for this purpose (Taylor, John; Hall, Robert Ernest, Macroeconomics, New York: W.W. Norton, 1993 pp. 637). The Consumer Price Index is a measure of prices of a selection of goods and services bought by a typical consumer (Mankiw, N. Gregory, Macroeconomics (5th ed.), Worth, 2002, p 81-107). The inflation rate is the percentage of change of a price index over time. For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for computing the yearly percentage rate inflation in the CPI for 2007 is The ensuing inflation rate for the CPI in this one year period is 4.28%. This means that the normal level of prices for U.S. consumers increased by roughly 4 % in 2007 (data as per Federal Reserve Bank of St. Louis on August 8, 2008). 5 Annual inflation rates in the United States from 1666 to 2004. Inflation And Interest Rates In the US, interest rates are determined by the Federal Reserve. The Fed assembles 8 times a year to set short-term interest rate targets. Interest rates directly affect the credit market as higher interest rates make borrowing more costly. By altering interest rates, the Fed attempts to attain maximum employment, steady prices and a good degree of growth. But when interest rates decrease, consumer spending rises and this in turn induces economic growth. Excessive economic growth is in fact very detrimental. At one extreme the economy is growing at a very fast rate and it can experience hyperinflation the outcome of which is problems. On the other hand if an economy has no inflation then it means that it has basically stagnated. The right level of economic growth, and thus inflation, is somewhere in the middle (http://www.investopedia.com/university/inflation/inflation4.asp retrieved on 5th April). Inflation And Investments When it comes to inflation many investors think of their investments. This is a very vital issue for people live on a fixed income, such as retirees. 6 The force of inflation on the portfolio depends on the type of securities which an individual holds. If a person has invested only in stocks then there will be not much trouble for him. Over the long run, a company's income and earnings must increase at the same pace as inflation. The exclusion to this is stagflation. The mixture of a bad economy with a swell in costs is bad for stocks. The principal problem with stocks and inflation is that a company's returns are always overstated. This is the reason that at times of high inflation, a company may look like it's prospering but it is really inflation that is behind the growth. (http://www.investopedia.com/university/inflation/inflation4.asp retrieved on 5th April). Philips Curve in the U.S in the 1960's Majority of the economists no longer use the Phillips curve in its unique form because it was shown to be too simplistic. But still today, tailored forms of the Phillips Curve that take inflationary anticipations into account remain powerful. The present situation of economy downturn in which the world today is also the outcome of inflation. 7 Demand-pull inflation Demand-pull inflation is a situation whereby total demand in an economy exceeds total supply. It calls for inflation rising as real gross domestic product rises and unemployment falls and the economy moves along the Phillips curve. This is normally described as "too much money chasing too few goods" (John Maynard Keynes The General Theory of Employment, Interest and Money, Basingstoke, Hampshire: Palgrave Macmillan, 1936, pp20-32). This is more correctly described as "too much money spent chasing too few goods", because only money that is spent on goods and services can cause inflation. This cannot be expected to continue over time due to increases in supply, unless the economy is already at a full employment level. The term demand-pull inflation is mostly associated with Keynesian economics. 8 Cost push inflation: Cost push inflation takes place when firms enhance prices to uphold or defend profit margins after going through an advance in their costs of production. This is shown by an inward shift of the short run collective supply curve which heads to a compression in total demand and a fall in real output, but a boost in the general price level. Cost-push inflation Conclusion: Thus from the different theories and the principles put forward by different economists we come to know what is inflation. Inflation affects the economy in such a way that the road to recovery takes a long time. The present situation in which the world is a downturn of the economy. Inflation is to be here for another 3-4years and this is what has been predicted by different economists. 9 Bibliography: 1. Callon, M. "Introduction: The Embeddedness of Economic Markets in Economics." In The Laws of the Markets, edited by Michel Callon. Basic Blackwell/The Sociological Review pp 1-57 1998, p.2). 2. Gibson-Graham, J.K. (2006) Postcapitalist Politics. University of Minnesota Press,. p.2. 3. Arthur Marget W, The Theory of Prices , Prentice-Hall, Inc., 1938, p. 93 4. Mankiw Gregory, N, Macroeconomics (5th ed.), Worth 2002, pp. 22-32 5. Robert Barro and Vittorio Grilli, European Macroeconomics, Macmillan, Ch. 8, 1994, p. 139, ISBN 0333577647 6. Mankiw, N. Gregory, Macroeconomics (5th ed.), Worth 2002, pp. 81-107 7. Abel, Andrew; Bernanke, Ben, Macroeconomics (5th ed.), Pearson 2005, pp. 266-269. Read More