Inflation in China

As the article “China’s Wen says country must control inflation” said, there is high inflation in China. Inflation is defined as a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index. (IB economics—Blink & Dorton) In China, the foods prices are increasing every year –compared to last September consumer prices rose 6.1%, but output of foods didn’t increase at all, which means the cost of production is increasing because aggregate supply is not enough, so there is a cost-push inflation in China’s food market. (Fig.1)

From the article that Chinese premier – Wen Jiabao want to increase the spending on food supply: “that was important to ensure the adequate of food supplies and increase the cost on agricultural reserves” (cite from article). As the situation in China now, the biggest problem is taxation that causing an increase in the costs of production. If China wants to control the cost-push inflation, the first thing to do is low down the farming land tax. Because in China, all of the land is belong to government, therefore the land tax is very high, and that makes people sold their land and moved. If tax of land decrease, which means farmers can save more money from lower tax, then they could spend more money on planting and farming, this will be more efficient. More output will bring more foods supply in food market, so as aggregate supply increase, the price level of food will relevant decrease. (Fig.2) Chinese government also should decrease the import tax on those farming materials if those are imported that there are more imported fertilize and feed than the domestics’ because their better quality, but as known, Chinese import tax always in a very high level. Therefore, if government lowers the import tax of these farming materials, then farmers will have more output which means increase of food aggregate supply. (Fig.3) Both of two policies will cause short run