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Inflation Form 5 PT 1

The document discusses inflation, including defining it, causes such as cost-push and demand-pull inflation, consequences like fixed income earners suffering and solutions like fiscal and monetary policy approaches. It also addresses hyperinflation and examples like Venezuela, and types of inflation such as imported inflation.

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Ashmita Mahadeosingh
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94 views24 pages

Inflation Form 5 PT 1

The document discusses inflation, including defining it, causes such as cost-push and demand-pull inflation, consequences like fixed income earners suffering and solutions like fiscal and monetary policy approaches. It also addresses hyperinflation and examples like Venezuela, and types of inflation such as imported inflation.

Uploaded by

Ashmita Mahadeosingh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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INFLATION

Form 5
Activity

? Compare the price of the following items when you were in Primary School to now:
? Doubles
? Dinner mint
? Orchard juice
? Bottle water
? Taxi fare from San-Fernando to your home

? How many grocery bags did your parents get with $100 5 years ago compared to now?
What is Inflation?

? Inflation is a situation in an economy where there is a general rise in the general price
level.
? With inflation, prices increase while the value of the dollar decreases. This is because
when prices rise, money fall in value
? N.B.
1) An increase in a small number of prices does not constitute inflation. The increase should
be evidenced across a wide range of goods and services
2) Increase should be sustained over time
Question

? Currently, globally we are facing worldwide inflation with many countries including the
US facing its highest inflation rate in a long time. Sri Lanka’s economy has collapsed.
What are some possible reasons given what is happening in the world today and who will
be most affected?
Answer

? Reason include Covid-19 pandemic, War in Ukraine that affects global supply chain,
increased shipping costs, rising petrol prices and of course greater demand than
supply. The high inflation rate is mainly driven by food prices.
? The most affected includes the most vulnerable in society such as persons on a fixed
income(pensioners), poverty stricken/low income homes, single parents, women
Deflation

? The opposite of inflation is Deflation

? Deflation is the persistent tendency for the general price level to fall over a period of time.

? Therefore it is the decrease in the general price level of goods and services
HYPERINFLATION- This is an economic phenomenon that occurs when inflation
increases very rapidly. The value of money decreases dramatically as the market loses
faith in the currency of a country. Unemployment increases, tax revenues decreases, cost
of living increases leading to political instability and unrest. Eg) Venezuela
? Venezuela has hyperinflation and the the highest inflation rate in the world. The money has no value
and $US currency is used for many transactions
Questions

? Why does Venezuela have the highest inflation rate in the world?
? What other countries have the highest inflation rate in the world?
? What does that mean for their economy?
? What is the inflation rate of Trinidad and Tobago and what is the main driver?
? What caused Venezuela's hyperinflation?
? Venezuela’s inflation problem is as a result of heavy printing of money,
mismanagement of economy, price increases because of shortages, devaluation, not
taking proper macroeconomic measures and sanctions that came after
? What is the inflation rate of Trinidad and Tobago? The inflation rate of Trinidad and
Tobago as of 2023 is around 8.3%
? Food prices is the main driver of inflation in Trinidad and Tobago
Answers

? What other countries have the highest inflation rate in the world?
1)Venezuela (South America) (1198%)- economic collapse
2)Sudan (Africa) (340%)-political crisis
3) Lebanon (Middle East) (201%)- economic collapse.
What does that mean for their economy? Citizens cannot afford basic essentials such as food
and medicine
TYPES/CAUSES OF INFLATION

? Demand pull inflation


? Cost-push inflation
? Imported Inflation
? An increase in the money supply
Causes of inflation

? 1) Cost Push Inflation- This takes place when producers raise prices of goods and services
because of increases in their costs of production (prices of the factors of production land,
labour, capital, entrepreneurship). Firms then pass on their higher costs to consumers in the
form of higher prices to maintain their profit levels
? 2) Demand pull inflation- Too much money in the economy chasing too few goods (
demand too high compared to what can be produced)
? This takes place when there is an increase in demand in the economy. When total demand
in the economy (households, firms, government, net export) increases and the supply of
goods in the economy cannot be expanded to meet this increase in demand, the result is
rising prices
? 3) Monetary inflation- This is caused by increases in the money supply. Increases in the
money supply will lead to an increase in the price level as there is an increase in AD for
goods and services in the economy with output remaining constant
? 4) Imported inflation – This form of inflation is caused when a country imports a large
portion of their food, finished goods, raw materials and fuel. This an element of cost-push
inflation.
INFLATION- Consequences and
solutions
CONSEQUENCES OF INFLATION

1) FIXED INCOME EARNERS SUFFER A FALL IN REAL INCOME


The purchasing power of money falls during inflationary periods so that a given amount of
money can buy fewer goods and services. This affects earners of fixed incomes as they are
unable to supplement the loss in purchasing power and their income do not change over time
2) BORROWERS GAIN
As the value of the debt to be repaid in real terms falls during an inflationary period. Inflation
tends to encourage borrowing
3) CREDITORS LOSE OUT
Creditors lose out because the sum to be repaid will now be able to buy less. Inflation tends to
discourage borrowing
4) SAVINGS LOSE VALUE
There is a fall in the real value of savings as the money loses value
5) SHOE LEATHER COSTS
Consumers walk around from place to place and are back and forth to the bank during periods
of continuous inflation. These are costs in terms of time and effort are called shoe leather costs
? 6) MENU COSTS- During periods of inflation, shops, stores and restaurants also have to
change price tags, labels and menus due to changes prices in the economy. These additional
costs to a firm are referred to as menu costs eg) a restaurant having to reprint all their
menus
SOLUTIONS TO INFLATION

? 1) Demand pull inflation- Deflationary fiscal policy ( reduction in government spending


and increase in taxes to reduce total spending in the economy and reduce the pressure on
prices
Deflationary monetary policy will also be effective as higher interest rates and a credit
squeeze will limit borrowing and spending thereby reducing inflation as there is less spending
and pressure on prices
? Cost-Push Inflation- Regulations to limit the power of trade unions to increase wages.
Government subsidies and grants to help reduce the cost of production so higher prices
would not be passed on to consumers and encourage firms to produce more goods and
services. This will put less pressure on prices by increasing overall supply of goods in the
economy
? Imported Inflation- Measures put in place to cut back on imported goods such as tariffs
and quotas. If local goods are substituted for foreign capital and raw materials the country
will buy less imports thereby reducing imported inflation
? Inflation due to increases in the money supply- Deflationary/Contractionary monetary
policy through higher interest rates and a credit squeeze reduce the money supply in the
economy. Reduced money supply and limits on borrowing will reduce spending in the
economy and take away the pressure from prices

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