The Effects of Inflation - Essay Example

? Inflation In an economy, there are times at which goods and services cost rises so that a unit currency will buy less than a previous time when it could buy more. With this general increase in the price of commodities, the currency in use losses it high purchasing power and weakens in relation to the prevailing conditions of the economy (Berlatsky, 2013, p5). The effects of inflation can affect an economy in positive and negative ways or both positively and negatively simultaneously because it affects the differently. In many circumstances, there are different explanations that could be given to the rise of inflation in an economy and which could explain the reasons why a currency can lose its purchasing power as compared to different circumstance in market. There are different reasons that contribute to inflation in any economy which varies in terms of supply and demand of commodities in supply and the means of exchange (Baumol & Blinder, 2011, p 37). According to economists, moderate or low economic inflation can be caused by the increase in demand of commodities or the scarcity on the side of suppliers. On the other hand, hyperinflation is attributed to high supply of currency in the market in which the individual who possesses it buys commodities at high prices than they ought to cost under normal circumstances. This has ever been witnessed in different countries where currencies have inflated to trigger an economic threat to the businesses within the society. In attempts to curb the inflation from rising to hyperinflation, various methods have been implemented which have led to stabilisation of the economy and improve the predictability of the market conditions. In United Kingdom, UK inflation happened and the country implemented various methods that led to balancing of the economy so that investors could continue to invest in that economy. In looking at the effects of inflation, it is good to consider the various things that lead to it and means that can be used to control it with a practical example of a country that has ever been affected and implemented some methods they used to control it with a focus at the advantages and disadvantages of those methods. In the economy, there are different explanations that economists give as the causes of the economic inflation that affect nation; these are given according to the different types of inflation that are found within an area. In general, the general causes of inflation plays around supply and demand of various things in the market that have direct influence of on the prices of the commodity to be bought. This means that abundance or scarcity of a particular determinant of trade i.e. goods or services and means of exchange, can cause prices of the commodities to rise within a short period. Following this perception, the abundance on the side of demand causes prices to go high because of the competition that arise from the different buyers who are interested in a particular commodity. The other perspective that causes inflation is the scarcity on the side of the supply where only little products over which buyers compete to attain making the sellers to determine the buyer through high prices that are attainable by just a few of them. From this perspective, there are two major categorisation of inflation in the economy, which are dependent on supply and demand in the market where individuals trade and which include moderate and high rate or hyperinflation (Credan, 2006, p45). Moderate inflation is caused by different situation of the demand and supply of the products in the market and can result from increase in the demand for products or reduction of supply. As a result of increased demand for goods or services, many customers that require a particular product contest for it financially and can lead to high prices of such products as in accordance to the law of demand that says that the higher the demand, the lower the supply and hence, the higher the price of the commodity. This results to inflation because in such a situation, a unit currency will buy a little commodity than it could have done if the supply and demand were balanced at equilibrium. On the other hand, when products are scarce, there is a likelihood that the supply into the market will be considerably low making the little that reaches the market to be bought at very high prices by only the people who will have the required amount on money (Bootle, 2003, p53). High rate of inflation or the hyper inflation happens when there is growth of money supply in the market where commodities and services are presented to the customers. As a result of this, those who possess the money within the market purchase the products at high prices because they already have it and not because the value of the product is that amount. This process makes many unit of a currency to purchase fewer products and this will lead to high prices of the commodities, which results to high inflation that will require to be curbed. Over time, economists have categorised this as the main cause of inflation in an economy and they argue that addressing the issue of growth of money in a market can lead deflation of the economy. When inflation occurs, there are different ways through which people are able to reduce the rate of inflation in an economy and cause normalcy in the stabilisation. In different situations, the affected economy implements different methods that curb the rise on prices of commodities that leads to inflation and ensure that products are paid for at their considerable value. Some of the ways that have been used in deflating an economy is to adopt a stable currency of another country and use it as their legal tender as it happened with Ecuador who adopted the US dollar in 2000. Another way of ending hyperinflation is to peg the currency of one nation on a stable currency of another nation as was realised when Argentina pegged its currency on the dollar in 1991 and Bulgaria and Estonia pegged theirs to the Germany’s to end their inflation. Another way to end inflation is the use of regulation of supply and demand in the market as it happened to UK in order to curb the high rate of inflation that had destabilised their economy (Hart, 2010, p173). UK inflation rates floating chart UK In order to reduce the effect of inflation the UK government chose to reduce the amount of the money that was in circulation in the market. This process was aimed at reducing the amount of money the people were obtaining from banks to supply to the market at any time which would raise the money in the market. The government implemented high taxes and interest rates that served two purposes i.e. it encouraged people to deposit the money they could have supplied to the market and reduced the possibilities of borrowing from banks, which would supply money to the market. This strategy of reducing the rate of inflation targeted the hyperinflation which happens due to the increased supply of money into a market that which leads to unnecessary increase in the prices of products (Susan, 2009, p312). Cost-push inflation curve Demand- pull inflation curve In curbing inflation using the supply policies, there are advantages that are recorded in the macro economy whereby people find it easy to access products and present them to the market. Another advantage to the macro economy is that it stabilises the economy by reducing barriers to the entry of products which makes the competitiveness of the market and therefore, improve the ease of transactions in the market. Through the different attempts, the supply policies help the macro economy to thrive because they reduce income taxes hence providing incentives for people to engage in the business. On the other hand, there are disadvantages of using supply polices approaches because they can lead to increased supply so that the demand is very low and therefore, destabilise the market by having a lot of commodities that have no buyers. This could result to harmful losses that can affect the suppliers of the product to the market because in their sales, they are likely to sell products at a price that is lower than the price of the commodity they sell (Susan, 2009, p321). The advantages of demand policies approach include reducing the taxation on the products which helps people to increase the amount of investment in the certain products. This reduces tremendously the cost of products in the market and hence reducing the inflation rates because the market stabilises on the supply and on the products. The other advantage of the demand policies is that they stimulate investment for the government reduces the direct taxes on products making the suppliers to easily obtain them and supplying them to the market. However, the demand policies approach can lead to the different over supply that has a result in the negative impact on the value of products because a lot of them will be supplied to the market (Susan, 2009, p321). Inflation occurs when there is a cause of imbalance in the situation in the market where there is an oversupply of either the currency of trade or the commodity to be traded or there is low supply of products. This result to increased price of commodity because of the competition to get the available commodity or the desire to reduce the excessive amount of money one possesses. This can be handled through different plans that reduce the amount of money that is available for use and providing the required products in the market that will ensure that people are spending what is generally acceptable. References Baumol, W. J., & Blinder, A. S. (2011). Economics: Principles and policy. Mason, OH: South-Western, Division of Thomson Learning. Berlatsky, N. (2013). Inflation. Detroit, MI: Greenhaven Press. Bootle, R. (2003). Money for nothing: Real wealth, financial fantasies, and the economy of the future. London [u.a.: Brealey. Credan, B. T. (2006). Trends in inflation research. New York: Nova Science Publishers. Hart, J. (2010). How inflation works. New York, NY: Rosen Pub. Susan, S. (2009). The International Politics of Surplus Capacity (Routledge Revivals). Taylor & Francis. Read More