Is inflation always bad for an economy? Inflation is a general Increase in prices and fall In the purchasing value of money measured as percentage; ways of measuring It Include the retail price index and the consumer price Index. One cost of Inflation Is that firms may have to spend money, time and effort moving money around financial Institutions (banks etc. ) so that they can ensure It doesn’t lose Its value, It Incurs shoe leather costs as a result of this.
However these costs can be offset by advances in technology, less human intervention is needed and costs are lower Another cost is that inflation leads to Geiger prices, these high prices reduce the competitiveness of the countries companies on global markets this reduces exports and leads to a dependency on imports, severely affecting a countries balance of trade. As imports are a leakage from the circular flow of income, it has negative effects on consumers within the country.
Reduced exports due to high prices may lead to firms having to close, this may lead to staff being made redundant and Increasing the unemployment rate. However, these negative effects may be mitigated If the firms with which the source entry Is trading with has a higher level of Inflation, In which case, the firms In the country will still remain price competitive with foreign companies.
One positive of inflation Is that If you have a low and stable rate of demand-pull inflation It may lead to companies producing more as they expect more consumption of their goods. This may lead to them hiring more staff or purchasing more technology, either increasing employment rates or increasing turnovers of other businesses that make the technology required, all of which increase economic activity and have positive effects.
Companies can reduce redundancies by increasing real wages by less than inflation, cutting costs but without making staff unemployed which would have sever negative effects on consumers and the economy. The economic costs of inflation are dependent on a variety of factors, such as the degree of Inflation, for example: higher levels of Inflation always have a worse Impact on an economy than low levels, e. G. Hyperinflation reduces the functionality of money and also as low Inflation reduces the effect of shoe leather costs It Is clearly better than high levels of Inflation. Another determinant of the effects of inflation is whether the inflation was correctly anticipated by consumers and producers and whether inflation in one country is higher than the countries it partakes in trade with because if this is the case, measures can be taken to reduce the negative impacts of inflation.
For example pensions could be increased to stay in line with inflation. If these factors are all set in a certain way then the effects of inflation can become positive, however generally this is not the case and inflation negatively affects an economy. Inflation always bad for an economy? By Chatterer Inflation is a general increase in prices and fall in the purchasing value of money measured as percentage; ways of measuring it include the retail price index and the consumer price index.
One cost of inflation is that firms may have to spend money, time and effort moving money around financial institutions (banks etc. ) so that they can ensure it doesn’t lose its value, it incurs shoe leather costs as a result of this. May lead to staff being made redundant and increasing the unemployment rate. However, these negative effects may be mitigated if the firms with which the source entry is trading with has a higher level of inflation, in which case, the firms in the country will still remain price competitive with foreign companies.
One positive of inflation is that if you have a low and stable rate of demand-pull inflation it may lead dependent on a variety of factors, such as the degree of inflation, for example: higher levels of inflation always have a worse impact on an economy than low levels, e. G. Hyperinflation reduces the functionality of money and also as low inflation reduces the effect of shoe leather costs it is clearly better than high levels of inflation.
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