1 Inflation: definition, measurement, forms, causes and mechanism.
2 Types of inflation. Demand inflation. Supply inflation
3 Inflation and unemployment. Types of unemployment. Okun's law, Phillips curve
4 Features of inflation processes and socio-economic consequences in Russia
5 Economic policy in conditions of inflation and unemployment. Anti-inflationary policy and its implementation in Russia
Active forms of conducting classes
A) Messages:“The concept of inflation, its essence, measurement and features. Types of inflation".
The message should be clarified through student questions. Result of the discussion: independent definition of the concept of inflation and its types, their comparison and characteristics.
B) Group conversation:“Causes of unemployment in Russia. Ways out of the current situation using the example of the Krasnodar Territory.”
Analysis of the state of unemployment in the Krasnodar region, its features and ways to eliminate it.
B) Collective decision and discussion of the next tasks:
Task.
Over the past 10 years, inflation in Russia has amounted to 10,000%. Calculate how many times prices have increased?
Independent work
The purpose of independent work is to effectively prepare for a lesson on this topic.
To do this, you need to study basic economic concepts:
inflation, suppressed inflation, open inflation, creeping inflation, galloping inflation, hyperinflation, stagflation, demand inflation, cost-push inflation, price index, unemployment, frictional unemployment, structural unemployment, seasonal unemployment, cyclical unemployment, hidden unemployment, inflation expectation, full employment, natural rate of unemployment, unemployment rate, Okun's law, Phillips curve.
Independent work allows the student to consolidate previously acquired knowledge using the following methods.
A) Problem solving:
Task 1.
The store needs general workers. The demand for labor is described by the equation L=10 x 0.2W. 7 people responded to the hiring ad. Two of them are willing to work if they pay at least 40 monetary units per hour, two - at least 25 monetary units per hour, two - at least 20 monetary units per hour, one - at least 15 monetary units per hour.
Determine: a) how many workers will be employed and at what level of payment; b) the state legally establishes the minimum daily wage at 40 monetary units per hour. How many workers will the store manager hire in this case?
Task 2.
There are conditional data: actual GNP in the nth year amounted to 1000 billion monetary units. The natural rate of unemployment was 7%.
Calculate the volume of potential GNP in the nth year.
B) Writing abstracts according to the proposed topics:
1. Inflation in the domestic economy: its features.
2. Features of the Russian labor market and prospects for its development.
3. The mechanism for regulating employment in a market economy.
4. Inflationary processes in the economy of Kuban and the features of their manifestation.
IN) Written test:
1. During a period of accelerating inflation, the interest rate:
a) Increases as employment falls
b) Does not change
c) Falls because the employment rate falls
d) Increases as the price of money falls
2. Under conditions of full employment, the level of frictional unemployment should:
a) Be less than 1%
b) Be less than the level of cyclical unemployment
c) Equal to zero
d) All answers are incorrect
3.Unemployment that exists in countries affected by economic recession is called:
a) Structural
b) Stagnant
c) Cyclic
d) Hidden
e) Friction
4. According to classical theory, unemployment is the result of:
a) Actions of monopoly firms
b) Imperfections of the market mechanism
c) Actions of trade unions and the state
1. During a period of accelerating inflation, the bank interest rate˸
a) falls because the price of money falls
b) falls because the employment rate falls
c) increases because the price of money falls
d) does not change
2. A clearly expressed anti-inflationary fiscal policy in the context of demand inflation implies˸
a) increasing the level of taxation and reducing government spending
b) reduction in both tax revenues and government spending
c) an increase in taxes and an increase in government spending
d) a decrease in the bank interest rate and an increase in government spending
3. A pronounced anti-inflationary monetary policy presupposes
a) increasing the level of taxation and reducing government spending
b) an increase in the interest rate and the sale of government bonds by the Central Bank
c) reducing the bank reserve ratio and selling government bonds by the Central Bank
d) purchase of government bonds by the Central Bank and reduction of interest rates
4. In how many months will prices double if the monthly inflation rate is 3.5%?
a) 7 b) 20 c) 35 d) 70
5. In the reporting year, compared to the base year, prices increased for food products by 4 times, for services by 2.5 times, and for industrial goods by 3.5 times; During this time, income levels increased by 333%. How has the standard of living changed in the reporting year?
6. Determine the monthly inflation rate (in percent) if prices double every 14 months?
a) 5% b) 7.8% c) 10% d) 2.8%
7. In order to defeat inflation, it is necessary˸
a) stop issuing paper money
b) freeze prices
c) freeze income
d) reduce state budget expenses, stimulate business activity, tighten tax and credit policies
a) true liberalization of prices and the transition to market pricing
b) release of the huge inflationary potential accumulated in a suppressed form in a command economy
c) government measures to repeatedly increase prices for goods and services
d) a temporary measure followed by a government policy of strict regulation of prices for goods and services
9. Inflation accompanied by general government control over price levels is called˸
10. The inflation rate is a change over a certain period of time˸
a) purchasing power parity of the national currency
b) exchange rate
c) average price level
d) discount interest rate
11. The most preferable types of inflation for the economy˸
a) open, unexpected, creeping
b) open, moderate, expected
c) hidden, galloping, expected
d) open, expected, galloping
Tests for self-control of skills in analyzing acquired knowledge - concept and types. Classification and features of the category "Tests for self-control of skills in analyzing acquired knowledge" 2015, 2017-2018.
1. Which of the following taxes can be passed on to the final consumer? – (3 options are correct) a) value added tax b) property tax of enterprises and organizations c) corporate profit tax d) inheritance and gift tax e) income... .
1. The pattern of the transition period and structural restructuring of the economy is NOT: a) financial stabilization b) budget crisis c) transformational economic decline d) loss by the state of the functions of a single manager of economic resources 2. Privatization... .
1. The human development index is determined by a combination of the following indices: - (3 options are correct) a) life expectancy b) level of education c) GDP per capita d) unemployment rate e) consumer price level 2.... .
1. The current account, as an integral part of the country's balance of payments, includes: - (4 options are correct) a) merchandise exports b) net income from investments c) transport services to foreign partners d) changes in the country's assets abroad e) unilateral.. .
1. Which of the following parameters should be attributed to the recession (crisis) phase? – (4 options are correct) a) a sharp reduction in production volumes b) an increase in unemployment c) a reduction in investment d) a fall in prices e) a fall in the rate of lending interest f) an increase in the exchange rate of valuable... .
1. Which of the following incomes should be included in GDP? - (3 options are correct) a) income (salary) of a teacher b) income from the sale of an old moped c) income of a gas station owner d) money transfer from parents to a university student e) cash. .. .
Error found:
We continue the series of publications devoted to the study of fundamental analysis of the international foreign exchange market (FOREX).
In the previous issue, we examined the relationship between changes in interest rates by central banks and changes in exchange rates using a simple model that describes the mechanism of changes in exchange rates over the long and medium term.
Today we will look at the relationship between inflation, interest rates and exchange rate changes, using the same simple model.
What is inflation
When considering the theory of purchasing power parity (PPP), we have already touched upon issues related to inflation processes. Now I propose to talk about inflation in more detail.
What, in essence, is such a phenomenon as inflation?
The answer seems obvious. This is an increase in prices for various goods or, in more scientific terms, an increase in the general price level.
To measure inflation, there are various indices, such as the gross national product deflator, consumer price index, producer price index. Moreover, the increase in the value of a particular index is usually explained in terms of its structural changes, as well as by subtracting from them various groups of goods, for example, cars or energy resources. Let’s say that a particular index has increased due to an increase in its component associated with rising oil prices, etc.
This approach is indeed based on information about changes that have occurred in the economy, but it misses the main point: inflation is a phenomenon that, first of all, relates to the value of the medium of exchange used in the economy (money).
The general economic price level can be viewed from two points of view. On the one hand, when the price level increases, the population is forced to pay large sums of money for purchased goods and services. On the other hand, an increase in the price level means a decrease in the value of money, since now one monetary unit allows you to purchase fewer goods and services.
Suppose P is the price level measured using some index. In this case, the number of goods and services that can be purchased with 1 monetary unit will be equal to 1/P.
Thus, when the general price level increases, the value of money decreases.
Supply and demand for money
The value of money, as well as the cost of ordinary goods and services, is determined by supply and demand.
The supply of money (the amount of money in circulation), as mentioned in the previous publication, is mainly determined by the monetary policy pursued by the Central Bank.
The demand for money (the amount of money that the population wants to keep with them in liquid form - in the form of cash or in current accounts) is determined by many factors, such as trust in credit institutions or the interest income that can be obtained by turning them into certain financial assets. But the main factor determining the demand for money is the average price level in the economy. The higher the prices, the more money will be required to complete each transaction, and the more funds the population will keep in their wallets or current accounts. Thus, an increase in the price level (a decrease in the value of money) leads to an increase in the demand for money and vice versa.
In the long run, the general price level corresponds to the value at which the demand for money equals its supply. That is, any deviation of the price level from the equilibrium should be eliminated over time.
Now let's look at the graph.
The supply of money is determined by the policy of the Central Bank, and therefore is a fixed value. The demand for money can be a function of both the price level and the value of money, which, as we saw earlier, are inversely proportional to each other.
In general, it is easy to notice that the graph strongly resembles the graph of the national currency exchange market.
Now let's see how a change in the money supply on the part of the Central Bank will be reflected in the price level and value of money.
Let’s say that to cover the state budget deficit, the Central Bank starts up a machine and prints the required number of banknotes. The supply of money increased, and the supply curve on the graph shifted upward, i.e. to the right.
As a result of the appearance of an excess amount of banknotes, the general price level should increase, and the value of money should decrease proportionally.
Inflation and interest rate
Finally, we come to consider the relationship between inflation and interest rates.
For further discussion it is necessary to make a small digression.
In economic theory, it is customary to divide all variables into two groups. The first is nominal variables, that is, quantities measured in monetary units, and the second real variables quantities measured in physical units.
Using this classification, it is possible to distinguish between real and nominal interest rates. Previously, we defined the real interest rate as the nominal (bank) interest rate minus inflation. Now we can expand these concepts somewhat.
The nominal interest rate is a nominal variable because it measures the return that can be earned on a certain amount of money by investing it, say, in a bank.
The real interest rate is a real variable because it reflects the relationship between the real value of assets in the present and the future, adjusted for inflation.
The importance of this approach lies in the fact that in the long term, the state’s monetary policy (i.e., decreasing or increasing the supply of money) affects only nominal values, while real ones remain unchanged.
This conclusion can be illustrated with the following example, not related to economics.
Let's say the official length of a meter has changed from 100 to 50 centimeters. All distances in this case will nominally double, but in fact remain the same. Money is essentially a measure of value, just as a meter is a measure of length.
Let's answer the question: what will happen to the nominal interest rate when the price level rises? Obviously, in order to motivate people to save, or, simply put, to lend money to banks, the state or other people in the same amount as before, the nominal interest rate must be increased. Moreover, at least enough to cover the population's losses from inflation. This applies to both bank interest rates and the Central Bank discount rate. Dependency in which The supply of money from the Central Bank, the inflation rate and the nominal interest rate increase proportionally usually called Fisher effect.
Now let's collect all the information received using a model that is familiar to us.
So, the government increased the money supply. This was reflected in the intensification of inflationary processes and a corresponding increase in the price level and a decrease in the value of money.
Let us recall a little the theory of PPP.
The nominal exchange rate of two countries should reflect the relative price levels in these countries. We have an increase in domestic prices, which means a decrease in the nominal exchange rate of the national currency.
In our model this will appear as follows.
Rising prices in the domestic market lead to domestic goods becoming less attractive than foreign ones, which should lead to an increase in imports and a decrease in exports, i.e. a decrease in net exports. The net export curve shifts downward, that is, to the left.
Since net exports in our model determine the amount of demand for the national currency, demand has correspondingly decreased. Since the real interest rate, and therefore the amount of net foreign investment, remained unchanged (remember the independence of real values from monetary policy), the supply of the national currency remained at the same level. As a result, the real exchange rate depreciated from E r 1 to level E r 2 , which was reflected in a proportional decrease in the nominal exchange rate.
Thus, in the long run we have a decrease in the nominal exchange rate with an increase in the supply of money from the state.
If we divide the period under consideration into shorter time periods, we get a more complex picture.
The nominal interest rate does not immediately respond to the acceleration (slowdown) of inflation processes. That is, in the short term we get both a decrease in net exports and a decrease in the real interest rate. The latter is reflected in the growth of net foreign investment and an even greater decrease in the nominal exchange rate compared to the base situation (I propose to consider this process on the graphs yourself). After some time, the Central Bank raises the discount rate taking into account the increased inflation rate (proportional increase in the nominal interest rate), and the real rate returns to the original level. Net foreign investment declines again and the nominal exchange rate appreciates slightly, but not enough to reverse the previous decline.
Thus, conclusions can be drawn. Acceleration of inflation in the long term should lead to a decrease in the nominal exchange rate of the national currency (conclusion of the PPP theory). But this decrease occurs as if in two stages: first, a decrease, more significant than the decrease in the ratio of external and domestic prices, and then some correction associated with an increase in the nominal interest rate (increase in the discount rate) correction. That is why large speculators so closely monitor changes in inflation rates (in fact, the release of consumer and producer price indices and the GDP deflator) and associate them with possible changes in discount rates in order to take the correct (long or short) long-term position in advance or determine the future main direction trend.
Inflation is one of the most serious problems in the economies of most countries in the world. The phenomenon of inflation existed at the beginning of the development of monetary relations in society and, as a rule, it manifested itself in difficult times for states and communities, such as war and coups d'etat. Today, inflation has become a constant companion of states, taking on a chronic form. What inflation actually is, what are the reasons for its occurrence, what does it lead to, and what methods of overcoming inflation are considered the most effective in the 21st century.
Causes and types of inflation
To consider the causes of inflation, it is enough to turn to the exchange equation (2.1), transformed into equation (2.4), from which it is clearly seen that the absolute increase in prices (P) is directly proportional to the volume of money supply (M), and inversely proportional to the growth of production volume ( U). As for the turnover rate of monetary units of the same name, in this case it is impossible to approach it (the turnover rate) from the standpoint of the classical quantitative theory, which takes the turnover rate of monetary units of the same name as a constant value.
Inflation and its impactInflation is a steady increase in the general level of money prices. Nowadays, controlling inflation is a priority task of government policy. To better understand the reason for such attention to this problem, consider the impact of rising prices, or, what is the same, a decrease in the value of money.
Potential Upsides of Inflation
At one time, it was believed that weak growth in the price level generally improves the investment climate and helps maintain aggregate demand, and therefore such growth did not raise significant concerns.
Taking into account the impact of inflation, uncertainty and risk when assessing the effectiveness of investmentsInflation is an increase in the general (average) price level over time. It is characterized by a general inflation index - an index of changes in the general (average) price level in the country and price levels for certain types of goods, works and services, counted from the initial moment - the moment of development of project materials. Inflation affects the effectiveness of long-term investments, the conditions for their financial feasibility, the need for financing and the effectiveness of participation in the project of equity capital.
Inflation in Russia in 2018Many citizens, whose well-being has declined over the past 2 years, are interested in what determines the cause of their troubles - a decrease in purchasing power. The answer is that inflation in Russia in 2018 will be hostage mainly to two factors:
1. Economic sanctions against Russia, including a credit blockade, which significantly affects the banking system and the real sector of the economy.
During a period of galloping inflation, the interest rate rises as it fallsOil prices remain the main driver of global financial markets and the dynamics of the ruble exchange rate Photo: Shutterstock
Oil fell from 31 to 27 dollars per barrel. and recovered. The ruble failed and remained around 80 per dollar. But a short-term drop in the ruble to 86 led to panic among ministers, banks and ordinary people, who again rushed to stores to buy household appliances.
At the end of the year, food prices rose significantly more than inflation. Experts warn that growth will continue.
No time for fat...
It is noted that the increase in food prices affected butter the most. Over the year, it has risen in price by 20.5%. Other dairy products increased in price by 9.5%. Fish and seafood increased in price by 8.6%, cereals - by 6.4%, bread and bakery products - by 5.9%. Pasta increased in price by 4.5%. The increase in prices for sunflower oil last year was 3.4%. Meat increased in price by 1.6%.
However, there is good news: not everything has gone up in price.
Inflation isAt the end of the year, granulated sugar fell in price by 6%, eggs - by 0.7%, vegetables and fruits - by 6.8%.
Rosstat clarifies that the average cost of a minimum set of food products in Russia in 2016 increased by 3.5% and amounted to 3.7 thousand rubles.
The growth, even minimal, especially in the context of declining incomes (12% over the last 2 years), is noticeable: Russians save not only on clothing, leisure, household appliances, but also on food. Adequate nutrition is no longer a natural need, but a luxury that not everyone can afford.
Russians save not only on clothing, leisure, household appliances, but also on food.
The Pricing Portal provides calculations of the consumer basket per person in large retail chains in Moscow. So, in order to buy the required volume, according to the minimum volume of products in the food consumer basket, prescribed in the Federal Law of the Russian Federation dated 03.12. 2012, a visitor to Pyaterochka will spend 5,887 rubles per month, Auchan - 7,809 rubles. “Crossroads” will cost more - 8100 rubles. per month. In “Azbuka Vkusa” you will have to leave 10,776 rubles. Let us remind you that in Russia in the third quarter of this year the government established a living wage of 9,889 rubles. Food products in the consumer basket should make up 50% of its volume.
“Import substitution programs in our country are still in their infancy, so their effect is felt much weaker than we would like,” reflects Stanislav Cherkasov, an expert in the consumer market and pricing policy, president of Sol Rusi. - We must start with the fact that when we were faced with the need to develop our own production, we had no base at all. Over the previous two years, the base has been created; to see the effect of import substitution, at least another two to three years are needed. Most of the raw materials still continue to come from foreign countries.”
Elusive interest
The experts are certainly right: the inflation rates published by Rosstat are averaged. Much depends on the region of consumption. In some areas, these data may correspond to reality, in others they may differ several times.
DailyMoneyExpert decided to compare prices in a single store in a specific region of Russia and analyze their dynamics from January 2016 to January 2017. We selected the food products that Russians bought most before the crisis from the Perekrestok chain of stores in Ryazan. Prices are taken from retail chain catalogs. The difference based on the results of one year turned out to be insignificant, but the DME inflation rate was almost three times higher than Rosstat data.
Grocery prices, Perekrestok stores, Ryazan, 2016–2017
Source: Perekrestok store catalogs
The difference over 12 months was 481 rubles, or almost 15%. This has a significant impact on the purchasing power of the population. Russians have long preferred bread and potatoes instead of milk and meat, the benefits of which are questionable.
“There is cost-push inflation in Russia,” says Yuri Goldberg. - Monopolies dictate the fashion for rising tariffs. Economic entities (due to rising prices in production chains and based on the prices of the producer of raw materials for their production, as well as electricity, heat and transport services) increase the prices of final products. They also shift the burden of the crisis onto the consumer and the increase in their costs due to the need to pay high exorbitant interest rates to banks. The lending rate from banks for production and agriculture also greatly boosted prices, as did the increase in monopoly tariffs. After all, the rate is determined by the policy of the Central Bank and is a record high for many years.”
Prices can't be stopped
In 2017, experts predict that prices will continue to rise. It is too early to hope for import substitution and higher oil prices.
“Food is becoming more expensive due to the instability of the national currency and natural inflation, which in the post-crisis period, which will be 2017, cannot be less than 10–15% in real terms,” warns Stanislav Cherkasov.
As Stanislav Cherkasov notes, the rise in price will primarily affect products containing cocoa beans. We are talking about coffee and chocolate. “Their cost could rise by up to 20%, since this year there is a shortage of cocoa beans on the market due to a low harvest.”
Growth is also promised for dairy products, prices for which already seem incredible. However, the growth will not be so rapid, experts reassure.
“The cost of milk next year will be influenced by two factors: a reduction in consumption volumes, which invariably leads to higher prices due to a reduction in production volumes, and a decrease in the share of state support for domestic dairy farmers,” the president of Sol Rusi clarifies.
Nevertheless, both experts and market participants urge not to lose optimism. 2017 is unlikely to be an economically favorable year. However, it will be more stable than the previous two. Probably, stability will not mean reducing the price of your favorite products, but getting used to new prices and eating what is available, and not what you like.
Grocery results 2016: we eat well, but not enough Olivier index 2017: alarmingly cheap
All topics:Macroeconomics
Inflation. Causes of inflationInflation (from the Latin inflation - inflation) is a stable tendency towards an increase in the average (general) price level. It is a long-term process of reducing the purchasing power of money.
The definition of inflation includes the concept of inflation rate, which is determined by the formula:
I = (P - P(-1)) / p(-1) ,
where P is the average price level in the current year;
P(-1) – average price level in the previous year.
Moreover, the average price level is measured by price indices.
The price level for open and hidden inflation is determined differently. In the first case, by the rate of increase in the price level (price index), in the second, by the ratio of state prices to prices of the legal or shadow market, the volume of forced savings, etc.
The process opposite to inflation is called deflation, and the slowdown in inflation is called disinflation. The price level in the future from the perspective of economic agents is called inflation expectations. Inflation varies according to the following main criteria:
1. Depending on the size of government regulation, open and hidden inflation are distinguished. Hidden inflation operates under conditions of strict government regulation and manifests itself in the growing shortage of goods and services.
Inflation and anti-inflationary policyOpen inflation operates under conditions of free prices characteristic of a market economy.
2. Depending on the rate of price growth, moderate, galloping and hyperinflation are distinguished. Moderate is inflation, the annual rate of which is measured by a number with one sign, i.e. to 10%. With moderate inflation, price increases are slow and predictable, but prices rise faster than wages.
Galloping – inflation, the rate of which is measured in two or three digits ranging from 20 to 200%. It indicates serious violations of monetary policy in the country. Money loses its value, so only the minimum amount of money needed to carry out everyday transactions is kept. Financial markets are depressed as capital flows abroad.
Hyperinflation is inflation of over 50% per month, the annual growth of which is four digits. Hyperinflation has the greatest impact on the redistribution of wealth. It causes distrust in money, as a result of which there is a partial return to barter and the transition from cash to kind wages. 3. Depending on the degree of foresight, a distinction is made between expected inflation and unexpected inflation.
Expected inflation helps prevent or reduce losses caused by inflation. The unexpected leads to a decrease in all types of fixed income and a redistribution of income between lenders and borrowers.
4. Depending on the factors that generate inflation, they distinguish between demand-side inflation and cost-push inflation. Demand-pull inflation is a type of inflation caused by an excess of aggregate demand, which production cannot keep up with, i.e. demand exceeds supply.
Cost-push inflation is a type of inflation that occurs as a result of an increase in average costs per unit of output. Increasing costs reduce the amount of output that firms are willing to supply at current price levels. As a result, supply decreases while demand remains constant and the price level rises accordingly.
The increase in production costs is due to three reasons:
a) an increase in wages;
b) rising prices for raw materials and fuel;
c) an increase in indirect taxes and excise taxes.
The combination of demand-side inflation and cost-push inflation forms an inflationary spiral. In this process, the inflation expectations of economic agents play a key role.
At a certain stage of its development, inflation becomes a factor in the degradation of the entire economy. Inflation has a particularly detrimental effect on firms and enterprises with slow capital turnover and the seasonal nature of production. All segments of the population suffer from inflation, especially those with fixed incomes, since compensation for inflation losses occurs with a delay and not in full.
Losses are suffered by creditors and lessors who provided funds or real estate under contracts, especially medium- and long-term ones.
Ultimately, inflation is fraught with a real danger of social explosion, because it gives rise to hatred among the people towards those who profit from intermediary operations, from the resale of goods and currency, who use power for personal gain.
Causes of inflationThe causes of inflation lie in the general macroeconomic equilibrium between aggregate demand and aggregate supply, in the entire system of imbalances throughout the economy of a given country. The immediate causes of inflation are:
1. To internal reasons:
a) deformation of the economy, manifested in a significant lag between industries producing consumer goods and industries producing means of production;
b) the state budget deficit associated with an increase in government spending;
c) imbalances at the micro- and macro-level, which are a manifestation of the cyclical development of the economy;
d) state monopoly on foreign trade;
e) monopoly of the largest corporations, firms, companies and setting prices in the markets;
f) high taxes, interest rates for loans, etc.
2. External reasons include:
a) structural global crises (raw materials, energy, food, environmental). They are accompanied by multiple increases in prices for raw materials, oil, etc. Their import becomes a reason for sharp price increases by monopolies;
b) banks exchange national currency for foreign currency. It creates a need for additional issue of paper money, which replenishes money circulation channels and leads to inflation;
c) reduction in revenues from foreign trade;
d) negative balance of foreign trade and balance of payments, etc.
Regarding external factors, it should be noted that during structural global crises, when goods and services cross at the same time other countries and inflation.
Anti-inflationary policyAnti-inflationary policy includes two fundamentally different directions of this policy:
— Regulation of aggregate demand.
— Regulation of aggregate supply.
Supporters of the first direction are Keynesians, supporters of the second are monetarists.
The Keyesian direction of anti-inflationary policy focuses on regulating aggregate demand, believing that effective demand stimulates supply growth. Factors of effective demand may be an increase in government spending and cheap credit, which, in turn, cause an increase in investment demand; investment demand will generate supply demand; An increase in supply will lead to a decrease in prices, i.e. to slow down or completely eliminate hyperinflation, bringing it to a moderate level.
The monetary direction of anti-inflationary policy places the regulation of aggregate supply at the center of its attention. Monetorists believe that Keynesian policy helps the country get out of the crisis ahead of schedule, but does not eliminate all its causes; imbalances between supply and demand remain. The founder of monetorism believes that inflation is a purely monetary phenomenon, its source is illiterate government intervention in the economy, and therefore ways out of inflation should be sought not in additional government spending, but in the growth of supply. Monetarists recommend a set of measures to reduce demand: this is monetary reform, increasing the cost of credit, reducing the budget deficit, and tax rates. These measures, in their opinion, should cause a decrease in consumer and investment demand, the bankruptcy of inefficient production, a decline in production, which in turn will free market niches from bankrupt producers, but preserve them for strong, competitive ones. Reducing tax rates will increase investment, increase product supply and ultimately reduce prices.
In practice, many countries use compromise tactics to combat inflation, using both Keynesian and monetary approaches.
Source - Yallai V.A. Macroeconomics. Pskov, PGPI, 2003. 104 pp.
All theoretical articles
CATBACK.RU 2010-2017
Demand inflation Types of inflationAccording to the causes of inflation, inflation of demand and inflation of supply or costs are distinguished. In this case, the main reasons are the growth of government orders, the growth in demand for means of production, subject to full employment and almost full utilization of production capacity, as well as the purchasing power of workers. For this reason, there may be an excess of money in relation to the quantity of production, so there is an increase in prices.
Cost-push inflation is characterized by rising prices due to rising production costs. Here the reason may be oligopolistic pricing policy, state financial and economic policy, increase in prices for raw materials, the influence of trade unions, which may demand higher wages. In practice, it is not easy to distinguish one type of inflation from another, since they are closely related and are in constant interaction. For example, wage growth can be considered both in demand inflation and in another situation in cost inflation.
Any inflation manifests itself as a disruption between supply and demand. First of all, this equilibrium is disrupted due to changes in demand, in which case demand inflation occurs. Another situation is an increase in production costs, so demand inflation and cost-push inflation should be distinguished. When cost inflation occurs, the supply price rises.
The discrepancy between supply and demand largely depends on the degree of development of the depth of several types of monopoly, including:
These monopolies are interconnected and influence the dynamics of both demand and supply, while the equilibrium point shifts upward along the price axis.
Causes and features of demand inflationWith a more detailed examination of demand inflation, it is possible to determine the excess of money in relation to the quantity of production and rising prices. With such inflation, employment is characterized as full, since it is stimulated by the high price of industry, which maximally utilizes production capacity.
Demand demand inflation can be caused by several monetary factors, the main of which is the militarization of the economy or increased military spending. Thus, military equipment is becoming less and less suitable for use in the civilian industry, so the monetary equivalent, which is opposed to military equipment, can turn into a factor superfluous for circulation.
Another important reason for demand-side inflation is the government budget deficit and increasing domestic debt. The government covers the deficit by issuing loans in the money markets or through additional issuance of fiat banknotes by the Central Bank.
Other causes of demand inflationThere are several other causes of demand inflation that can be considered. The main one is the credit expansion of banks. An important reason for demand inflation also lies in imported inflation, which is the emission of national currency in excess of the needs of commodity turnover. This situation arises when countries with a surplus balance of payments purchase foreign currency.
Another reason is overinvestment in heavy industries. In this case, an element of productive capital is constantly extracted from the markets, instead of which additional cash equivalents are put into circulation.
Examples of problem solving
Any state quite often faces issues such as inflation and deflation. They represent changes in the general price level in the economic environment. During deflation, the price increases, and during inflation, on the contrary, it decreases. Most often in practice, it is the second option that occurs, and the fall in the price level occurs for all goods at the same time. But an increase in the price level is usually observed only for certain groups of goods. As is clear, deflation means not only the direct rise in prices, but also all the processes accompanying this, which will be discussed later (in case you do not quite understand what inflation is).
Causes and consequences of deflationHaving considered the concept of deflation, it is also worth mentioning the main causes of deflation and its possible consequences. This phenomenon can be caused by a wide variety of factors:
- increase in the value of money;
- insufficient amount of financial mass on the market;
- an increase in labor productivity, causing a decrease in the cost of a number of products;
- refusal of the population to spend their funds in anticipation of a further increase in their value.
In most cases, the consequences of deflation are negative, for example, it can be the emergence of so-called deferred demand - buyers deliberately postpone the purchase of goods, which ultimately leads to a reduction in demand and problems in production. This phenomenon can also lead to a decrease in wages, bank lending volumes, loss of profitability of companies and, as a result, reduction of personnel. Such processes do not have the best impact on the economy.
As for the opposite phenomenon - inflation, it can be caused by an increase in aggregate demand, a reduction in aggregate supply. Its consequences are quite extensive: in the production sector it can be a decrease in employment, depreciation of loans and the entire savings fund. The danger to the money supply is that money loses its own value and can lead to financial collapse.
The consequences for economic relations are that creditors stop lending money, buyers begin to doubt the real value of goods, and business owners cannot choose a reasonable price for their products.
Only normal inflation is allowed, which can stimulate economic development if carefully controlled.
An example of this phenomenon is the current deflation of the ruble, which has already significantly affected changes in market prices and the level of consumer demand.
Question No. 91734The definition of deflation speaks for itself: when prices rise, it becomes more difficult for buyers to make choices and they have to accept goods of lower quality. Therefore, such a process not only negatively affects the domestic market, but also significantly affects the foreign economy.
An example of inflation can be seen in the late 90s in Russia, when controlling prices and ignoring demand caused an acute shortage of goods, many of them completely disappeared from store shelves. Coupons and a card system were introduced in cities, and food orders were formed. As a result, all this developed into severe social tension, political instability and a deep crisis. Those times were later called not just inflation, but hyperinflation.
Why is deflation bad for the population?For the working class of the population, the main criterion for why deflation is dangerous is the high risk of losing a job, as well as the limited opportunity to obtain consumer loans. The average person has to postpone more or less large purchases for a better future, because rising prices do not make it possible to freely manage financial resources.
Having figured out why deflation is bad, you also need to understand whether inflation or deflation is better. Inflation, under certain conditions, is a completely normal economic process. At a normal level of inflation, the overall increase in the price level is no more than 5% annually. But deflation can be an alarming harbinger of a crisis, especially if it simultaneously manifests itself in different areas. It is also usually accompanied by severe unemployment.
Having considered what deflation is in the economy and its reverse process – inflation, we can say with confidence that both of these processes, if uncontrolled, can cause quite serious instability in the state’s economy.
That is why at the present stage of economic development, even the slightest changes in prices, downward or upward, are carefully controlled in order to prevent such processes from affecting the wealth of the population, the functioning of domestic enterprises and to maintain the domestic market at a stable level.
Depending on the rate of price growth, there are:
Moderate I., when prices rise slowly, up to 10% per year. Within it, creeping is sometimes distinguished - up to 5% per year. At the same time, prices are quite stable, savings do not depreciate, and there are normal conditions for investment.
Galloping (“Latin”) I. - characterized by rising prices up to 100-200% per year. Money is rapidly depreciating, everyone is trying to invest it in material assets, in foreign currency, and invest abroad. The conditions for economic development are significantly distorted, but inflation may still not cause destructive consequences over long periods.
Hyperinflation - prices rise very quickly, up to 1000% per year or more. All economic entities strive to get rid of money as quickly as possible. The population spends all current income and savings on the purchase of consumer goods and any other material assets (real estate, gold, currency), which are not necessarily subsequently used rationally. Enterprises are stockpiling raw materials and stockpiling finished products in anticipation of a new surge in prices. The volumes of all types of speculative transactions are growing. Inflationary trends are intensified by a surge in aggregate demand under the pressure of inflation expectations. An inflationary spiral begins to unwind: a rapid increase in the cost of living forces a sharp increase in nominal wages, which, in turn, results in rising costs and a new increase in prices. In Ukraine, hyperinflation developed in 1992-1994. In 1993, the price index exceeded 10,000%.
According to the degree of surprise, I. is divided into:
Foreseen (predicted), which economic agents expected and even planned. For example, the expected inflation rate is factored into budget calculations for the upcoming financial year.
Galloping inflationThis development of events makes it possible to neutralize the negative consequences of inflation to a certain extent.
Unforeseen - often associated with inflation shocks, i.e. sharp jumps in the price level, which can become an impetus for a long-term inflationary process.
Depending on the forms of manifestation, the “depth” of state regulation and the tools of anti-inflationary policy, the following are distinguished:
Explicit (open) - manifests itself in rising prices and depreciation of the national currency.
Hidden (suppressed) - manifests itself in a shortage of goods and services, with administrative regulation of prices if they are underestimated and do not correspond to the equilibrium level.
Depending on the direction of inflationary impulses in relation to the system, it happens:
Imported information, if the reason is an increase in prices for imported goods, subject to a constant exchange rate of the national currency. The greater the share of foreign trade in GNP, the greater the effect of “import” I.
Exported goods – when prices for domestic goods manufactured for export increase.
Depending on the object of study, I. are distinguished:
National, regional - where the object is the dynamics of wholesale and retail prices, the GNP deflator in the country and at the level of the union of countries.
Global – a general change in the price level on world markets.
Depending on the success of the economy’s adaptation to the rate of price growth, the following are distinguished:
Balanced I., when prices grow moderately and steadily, and other indicators change adequately.
Unbalanced I. – prices jump at different times, which leads to changes in relative prices and deforms the structure of demand, and the economy cannot adapt to this.
Depending on the state’s ability to influence sovereignty, it can be:
Controlled - the state can slow down or speed up the pace of innovation in the medium term.
Uncontrollable - there are no real sources for adjusting I.
Depending on the causes of occurrence and the mechanism of development, the following are distinguished:
Demand-pull inflation, which occurs due to the fact that the growth rate of aggregate demand exceeds the growth rate of national output in conditions of limited production potential. Economics: “Too much money chasing too few goods.”
Cost-push inflation (or supply inflation) develops when the growth in production costs outstrips the increase in labor productivity and real income, i.e. under the influence of non-monetary factors.
It is possible to trace the mechanism of development of I. by analyzing the last two types.
⇐ Previous123Next ⇒
