Inflation always bad for an economy?
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 higher 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 country 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
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 higher 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 country 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