High Inflation Flashcards
What is inflation?
A rise in the general level of income
and a fall in the value of money
What concerns us the most?
The rate at Which prices change
Why is income and wealth an issue here
People on fixed incomes -their money buys less
Can be severe e.g. Retired, families
But note state pensions and company pensions which are increased to offset inflation
Why do creditors suffer
Because the money they receive on payment buys less than when they lent it. Debtors gain
In the past 20 years in uk the inflation rate has been as high as…
20 per cent
20/20
How does high inflation effect asset prices
Can change nominal value of land, property, jewellery, paintings etc.
Normally increase
How does high inflation effect production
May build in additional level of profit
But lack of spending - costly and disruptive . Element of uncertainty and makes predicting future costs difficult
Lower investment and economic growth. Ultimately leads to higher unemployment
What are industrial relations like given high inflation?
Pay demands that are inflationary
Lead to poor industrial relations and conflicts
Lost output. Lower profits. Reduced investment
Damage country’s performance
Balance of payments…
U.K. Prices rise faster than those of competing countries - export sales will decline and domestic markets will be penetrated by imports
Deterioration of
Expectation of rising prices can make inflation…
Self perpetuating
If people expect prices to rise, they’ll seek higher wages to compensate
Harder to control
Key points to think about given high inflation
Employment Industrial relations Exports and imports Expectations Productions Redistribution of income and wealth
Who benefits from inflation?
Those that can increase their income in line with price rises
Those with high levels of debt - erode away the value of the borrowing
What are the 2 types of inflation?
Demand pull inflation
Cost push inflation
What is demand pull inflation?
Occurs when total spending (aggregate demand) in the economy exceeds the total value at current prices of what the economy is able to produce
Extra demands
What is cost push inflation?
Occurs before full employment is reached and is associated with a rise in production costs which is passed on in higher prices
