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The increase in production leads to the fact that manufacturers can create more supply. In the long term, this causes the situation that the goods produced will not be in demand, which will provoke inflation. In economics, this situation is called an overproduction crisis. It occurs when too many products are produced, which leads to an imbalance between supply and demand (Britton, 2016). The essence of the situation lies in the fact that business weakens consumer demand by saving on labor or capital goods to maximize income. As a result of this situation, the volume of production becomes much greater than demand. Firms are unable to sell the accumulated volume of products (Boyle, 2021). In this situation, some companies go bankrupt, while others begin to fire employees massively.
One of the most famous and terrible consequences is the Great Depression of the 30s of the last century. Another striking example is the event that happened in 1973 (“Oil crisis of the 1970s,” 2016). During this period, several Arab states, which were oil exporters, began to set prices for oil on their own. As a result, the cost of it soared and continued its growth. This situation has become the cause of the worldwide economic crisis.
To get out of the crisis of overproduction, it is necessary to take several measures. First, it requires a technology update, the introduction of new equipment and technology. Second, weak producers must leave the market – such players almost always go broke during a crisis, as they use backward technologies. However, there is always a way out of this overproduction. After this period, there are usually phases such as depression and recovery. In the end, the situation is stabilizing – demand again starts to equal or exceed supply.
The exchange rate is highly influenced by inflation which eventually depreciates the currency. The cost of imported goods is growing, followed by the medium price rate in the economy. Countries with a high inflation rate will eventually face a decline in the rate of their currencies, while countries with a lower inflation index will keep the rate stable (Monfared & Akın, 2017). It is important to note that the depreciation of the national currency against the key foreign currency for the economy makes it possible to predict the inflation dynamics of the national currency.
References
Boyle, M. (2021). What causes inflation and who profits from it? Investopedia.
Britton, J. (2016). Production, overproduction and overproduction crises. Liberation School.
Monfared, S., & Akın, F. (2017). The relationship between exchange rates and inflation: The case of Iran.European Journal of Sustainable Development, 6(4), 1-12.
Oil crisis of the 1970s. (2016). Energy Education.
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