Objective Inflation in Philippines Essay

As obvious as it seems, the world is run by money. Businesses are established to earn money. Roads and other infrastructures were built because of money. People work because of money. This is of course in a metaphorical sense, but one cannot deny the fact that almost everything is valued through money and by money. In this economy, in this society, the involvement of money is extensive. Without that certain buying power, an individual cannot suitably fulfill his or her own needs and wants. This insufficiency of buying power is greatly seen in those people living in poverty.

In a recent study by the Philippine Statistics Authority in 2015, 21.9% or 1 in 5 Filipinos live in poverty. That is significantly a huge number of the country’s population who struggle to earn enough money for their basic living. With this, we come to focus on one of its many causes, which is the rise of the inflation rate of the country. Last September 2018, the country experienced the highest inflation rate in the past 9 years, with 6.4% (PSA, 2018). However, it has declined to 4.4% last January this current year, but still considerably high. Furthermore, an in-depth understanding of inflation must be grasped first—what is inflation, its causes and effects, and how it relates to poverty—to ascertain its impact and significance on the issue and its resolution.

First, what is inflation? According to Mr. Amador T. Sendin (2019), Chief Financial Officer (CFO) of Macroasia Corporation and also a CPA, the general meaning of inflation is that it is driven by the expansion of the supply of money more rapidly than the supply of goods and services. The value of money declines and prices rise. Unlike when its supply is at a constant or a slow, steady rate, the value of money will be relatively stable. This is directly related to the law of supply and demand. According to Bartolome (2018), the computation of inflation is based on the Consumer Price Index (CPI) of the economy. The CPI indicates the change in the average prices of primary goods and services normally bought by a household. It is the most common tool that is used in the calculation of the purchasing power of the peso and the inflation rate (PSA, 2018).

In the case of the Philippines last year, the impact of the Train Law, where additional taxes were imposed on commodities, resulted in an increase in prices of the primary inputs to production. Processed goods became more expensive and people had to prioritize purchases and cut consumption (Ibon, 2018). Oil prices rose based on global supply and demand concerns especially since the Philippines is only a net importer of oil. Weather is also a disruptor. During the months when the country has experienced severe typhoons, commodities were scarce, especially agricultural products, causing prices to spike. Consequently, its major effect was it brought higher prices, not only to the masses but also to businesses, by their operating costs going higher. If the costs would not be able to pass on to the consumers, this reduces the net income of the businesses. This, in turn, will result in some businesses cutting expenses as well as salaries and wages, therefore causing unemployment. For people, especially those whose earnings are limited, inflation causes the prices of goods to be bought to be higher. Thus, people can only buy less. The effect came from the top until it came down to the consumers, especially the poor with low buying power, who are the primary sufferers. So, in simple terms, how does this affect an individual? It means one needs to pay more for the same goods and services.

Therefore, how does this inflation relate to or contribute to poverty? In a study conducted by GP Poverty & Equity (2017), in general, inflation and poverty have an indirect yet impactful relationship. It has been proven that higher inflation rates only worsen the poverty issue in a country unlike those with low inflation rates tend to have a lower poverty incidence. For instance, according to Sheridan (2019), the inflation of Japan was only 0.3% in December 2018. Moreover, it is also evident that Japan’s economy is developed and its poverty incidence is low. In comparison to the Philippines, this is the exact opposite as inflation is a major issue. In the past year, the effect of inflation has been truly felt—even the people in the middle class have experienced the rise of commodity prices, what more to those people in poverty? In an article written by Ordinario (2018), he said that the current rise of inflation in today’s time is consistent with the findings of a 2008 study by Asian Development Bank (ADB) economist Hyun Son. That study stated that a 10% increase in the prices of food could lead to 2.3 million poor Filipinos, while the same increase in non-food prices could lead to an addition of 1.7 million to poverty. This only means that as the inflation goes higher, more Filipinos will be plunged into poverty. The government is doing poverty reduction measures, but it seems there are still many first-in-line problems that must be taken into consideration first—and the issue of inflation is only one of many. In an article by Rivas (2018), the Philippines was warned by the World Bank, as Rong Quan, World Bank Senior Economist, said that persistently high inflation slows down the poverty reduction measures of the country, which in turn may only make the efforts wasted.

That being said, the question for resolution is asked, what is the mere solution to this? It is simple: to lower the prices of goods and services. A very direct and brief statement for a resolution but still branches out to several points to achieve the goal of controlling inflation to lessen poverty. First, is the proper control of the country’s monetary policy. The government must efficiently circulate the flow of money toward the citizens to avoid overprinting and debt-taking from creditors. Second is the strict implementation and proper usage of the fiscal policies of the government. These fiscal policies refer to the taxes collected as government funds. These funds must be put into projects for poverty alleviation such as free education, housing, and low-cost goods and services. Third, the government must already have the capability to export its goods. Nevertheless, if exportation is not extensively possible, the government can adhere to a faster importation of basic goods to garner a larger supply for the masses. This, in turn, will force the market to lower its prices since the supply is large enough for the demand. Ultimately, the greatest error and misconception that people think of as a way out of poverty is—the increase in salaries and wages. This is entirely counter-productive to the goal in the long run. As agreed upon by Sendin (2019), said that these salaries and wages will always be seen by people as wanting or lacking. Increasing this item just increases the cost base for the pricing of goods, and as prices increase, the inflationary wheel rotates endlessly. The reason people are complaining about the buying power of their wages is that the basic services–food, clothing, shelter, education, health, etc. are simply becoming more expensive, often due to the failure of the government. The government should do more to increase the non-wage benefits such as coverage for health insurance, free education, lower power and transport costs, etc. A better government implementing more programs beneficial to the poor or uplifting the general living conditions can better support workers. In such a situation, the masses will see no justification for the clamor that wages are insufficient.

In conclusion, the issue of inflation is one of the great foundations of the larger issue, which is poverty. Quoting Uy (2018) in her article “Thinking Beyond Politics” she said, “The inflation mess is the failure of our top officials to coordinate the appropriate policy response to several long-standing issues. The administration has lined up several grand plans within its term, but unless it manages to address these issues, it will only risk biting more than it can chew.” It means that only those in power can directly and immediately address the problems in inflation and resolve them. Hence, the only job of the people is to adhere to these implemented policies, which in the hope is better, by those in power.

Venezuela and US Inflation Essay

Economic Situation

• Foreign trade

The United States supplies more than one-third of Venezuela’s food imports. Recent government import policies have led to a shortage of goods throughout the country. During the crisis in Bolivarian Venezuela, Maduro decided to purchase hundreds of military vehicles to be used against large waves of protests instead of purchasing goods for Venezuelans, allocating only 15% of the necessary amount of funds to buy goods for supermarkets.

• International assistance

In January 2015, Maduro toured countries in Asia seeking support following the steep decline in oil prices since June 2014, asking for financial agreements and the cut of production by OPEC. Despite statements by Maduro saying that multibillion-dollar agreements were made, few details were given, oil prices fell another 8% and his tour was described as a failure.

In May 2016, the National Assembly passed a law compelling the executive branch and Nicolás Maduro to accept foreign aid for healthcare and medical supplies, including medicines that have experienced supply shortages. This law intends to offset the decline in services and supply shortages. Every citizen and resident in Venezuela is entitled to healthcare as both a human and constitutional right and guaranteed by law.

• Economic sanctions

Economists have stated that shortages and high inflation in Venezuela began before US sanctions were directed toward the country. The Wall Street Journal says that economists place the blame for Venezuela’s economy shrinking by half on ‘Maduro’s policies, including widespread nationalizations, out-of-control spending that sparked inflation, price controls that led to shortages, and widespread graft and mismanagement.’ The Venezuelan government has stated that the United States is responsible for its economic collapse. The HRW/Johns Hopkins report noted that most sanctions are ‘limited to canceling visas and freezing assets of key officials implicated in abuses and corruption. They in no way target the Venezuelan economy.’ The report also stated that the 2017 ban on dealing in Venezuelan government stocks and bonds allows exceptions for food and medicine and that the 28 January 2019 PDVSA sanctions could worsen the situation, although ‘the crisis precedes them’. The Washington Post stated that ‘the deprivation long predates recently imposed US sanctions’.

On 9 March 2015, Barack Obama signed and issued an executive order declaring Venezuela a national security threat and ordered sanctions against Venezuelan officials. The sanctions did not affect Venezuela’s oil company and trade relations with the US continued. In 2017, Trump’s administration imposed additional economic sanctions on Venezuela. In 2018, the United Nations High Commissioner for Human Rights (OHCHR) documented that ‘information gathered indicates that the socioeconomic crisis had been unfolding for several years before the imposition of these sanctions’.

According to the Wall Street Journal, new 2019 sanctions—aimed at depriving the Maduro government of petroleum revenues—are the most significant sanctions to date, and are likely to affect the Venezuelan people. In 2019, former UN rapporteur Alfred de Zayas asserted that US sanctions on Venezuela were illegal as they constituted economic warfare and ‘could amount to ‘crimes against humanity’ under international law’. His report, which he says was ignored by the UN, was criticized by the Latin America and Caribbean program director for the Crisis Group for neglecting to mention the impact of a ‘difficult business environment on the country’, which the director said ‘was a symptom of Chavismo (Chavez’s ideology) and the socialist governments’ failures’, and that ‘Venezuela could not recover under current government policies even if the sanctions were lifted.’

• Currency

The growth in the Central Bank of Venezuela’s money supply accelerated during the beginning of President Maduro’s presidency due to massive currency printing, which caused more price inflation in the country. The money supply of the Bolivar in Venezuela increased by 64% in 2014, three times faster than any other economy observed by Bloomberg at the time. Due to the rapidly decreasing value of the Bolivar Fuerte, Venezuelans jokingly called the currency ‘bolivar muerto’ or ‘dead bolivar’.

In September 2014, the unofficial exchange rate for the Bolivarian Cúcuta reached 100 Bs.F. per 1 USD. In May 2015, the Bolivar lost 25% of its value in a week, with the unofficial exchange rate being at 300 Bs.F. per 1 USD on 14 May and reaching 400 Bs.F. per 1 USD on 21 May. The Bolivar dropped sharply again in July 2015, passing 500 Bs.F. per 1 USD on 3 July and 600 Bs.F. per 1 USD on 9 July. By February 2016, the unofficial rate reached 1,000 Bs.F. per USD.

In November 2016, the Bolivar saw its largest monthly loss of value ever. The Bolivar to the United States dollar conversion rate passed the 2,000 Bs.F. per 1 USD on 21 November 2016, reaching nearly 3,000 Bs.F. per 1 USD only days after it passed the 2,000 mark. On 29 November 2016, the conversion rate increased to over 3,000 Bs.F. per 1 USD. The Bolivar lost over 60% of its value.

The main currency of Venezuela since 20 August 2018 has been the bolívar soberano (sovereign bolivar).

It will replace the bolívar fuerte after a transition period. The primary reason for replacement is at a rate of 1 Bs.S. to 100,000 Bs. F was hyperinflation.

• National cryptocurrency

In December 2017, Nicolas Maduro announced that Venezuela would issue an oil-backed state cryptocurrency called the ‘Petro’ in an attempt to shore up its struggling economy.

Effects of flawed policies

1. Economic crisis: three years of recession

Venezuela is in its third year of recession. Its economy is expected to contract 10% this year, according to the International Monetary Fund. The IMF forecasts Venezuela will be in recession until at least 2019.

While the economy shrinks, the price of goods is skyrocketing.

2. Venezuela’s broken engine: oil

Things got really bad when oil prices started to plunge in 2014. Venezuela has the world’s largest oil reserves, but the problem is that oil is the heart of Venezuela’s economy. It makes up over 95% of Venezuela’s revenue from its exports. If it doesn’t sell oil, the country doesn’t have money to spend.

Oil prices were over $100 a barrel in 2014. In 2016, they hovered around $50 a barrel, after dropping as low as $26 earlier this year.

The problem is that Venezuela has not taken care of its cash cow. It has squandered opportunities to invest in its oilfields when times were good. Also, because the country has neglected the upkeep of its oil facilities, production has dropped to a 13-year low.

Venezuela’s state-run oil company, PDVSA, hasn’t paid the companies that help extract its oil, such as Schlumberger (SLB). In the spring, Schlumberger and other companies dramatically reduced operations with PDVSA, citing unpaid bills.

PDVSA warned that it could default on its debt if bondholders didn’t accept new payment terms. Just enough investors accepted a new deal that will allow PDVSA to likely avoid default that year. However, experts say it has only delayed a default by a small period.

3. Soaring food prices & broken hospitals

Venezuela’s food shortages became extremely severe from 2016 onwards. Venezuelans went weeks, in some cases months, without basics like milk, eggs, flour, soap, and toilet paper.

Despite a crashing currency and falling oil revenue, the government continued enforcing strict price controls on goods sold in the supermarkets. It forced food importers to stop bringing in virtually everything because they would have had to sell it for a major loss.

In the first half of 2016, food imports were down by nearly 50% from the same time a year ago, according to several estimates.

Only recently has the government stopped enforcing price controls, and food has returned to supermarket shelves. However, prices are so high that few Venezuelans can afford the food.

Medicine remains in short supply too. Venezuelans hunt for penicillin and other remedies at pharmacies everywhere, often without any success. The country’s public hospitals have fallen apart, causing people, even infants, to die due to the scarcity of basic medical care.

4. Running out of cash and gold

Venezuela is running out of cash quickly. It doesn’t have enough money to pay its bills for too long.

The math just doesn’t add up: It owes $15 billion between now and the end of 2017, while the nation’s central bank only has $11.8 billion in reserves. At the same time, Venezuela’s only other cash source, PDVSA, is pumping less oil and risking default.

Most of its reserves are in the form of gold. So, to make debt payments this year, Venezuela has shipped gold bars to Switzerland.

China used to bail out Venezuela and loan it billions of dollars. But even China has stopped giving its Latin American ally more cash.

5. Hyperinflation

From 2006 to 2012, the government of Hugo Chávez reported decreasing inflation rates during the entire period. Inflation rates increased again in 2013 under Nicolás Maduro and continued to increase in the following years, with inflation exceeding 1,000,000% by 2018. In comparison to previous hyperinflationary episodes, the ongoing hyperinflation crisis is more severe than those of Argentina, Bolivia, Brazil, Nicaragua, and Peru in the 1980s and 1990s, and that of Zimbabwe in the late 2000s.

In 2014, the annual inflation rate reached 69%, the highest in the world. In 2015, the inflation rate was 181%, again the highest in the world and the highest in the country’s history at the time. The rate reached 800% in 2016, over 4,000% in 2017, and about 1,700,000% in 2018, with Venezuela spiraling into hyperinflation. While the Venezuelan government ‘had essentially stopped’ producing official inflation estimates as of early 2018, inflation economist Steve Hanke estimated the rate at that time to be 5,220%. In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019. The Central Bank of Venezuela (BCV) officially estimates that the inflation rate increased to 53,798,500% between 2016 and April 2019.

Lessons learned

Many lessons can be learned from Venezuela’s crisis.

    • Belief in incentives more than ideology: You cannot create a new economy out of a flurry of decrees. A law that forces companies to produce and sell goods at a loss with unrealistic price controls will lead companies to stop producing.
    • Learn fiscal restraint: Having a lot of money poorly managed is worse than having less money. Saving and investing wealth for the future is extremely important. Also, the crowding-out effect of government spending has to be taken into account.
    • Printing money at will is harmful: Economists can go back and forth about the roots of inflation, an academic debate in countries where inflation is just a few percentage points and where the economy is soundly managed. If you print money with no backing by another currency or real economic growth then, inflation will speed up quickly. Venezuela has the highest inflation on earth.
    • Excessive Nationalisation/Expropriation is disastrous: Firms were often expropriated on a whim, and state-owned endeavors were launched without careful thought or planning. This led to a bloated bureaucracy, growing corruption, and a long-term decline in key sectors. State-owned enterprises often ended up in the hands of corrupt bureaucrats who made them into their domains, and then milked them dry. A key example of this was in 2010 when Chavez launched an offensive in agriculture by expropriating hundreds of farms and food industries. Given that these enterprises were often undercapitalized and unproductive, state intervention was necessary. But most of the firms were then handed over to bureaucrats who had little preparation or oversight. The result was complete mismanagement, and a drastic decline in food production thereafter.

Grade Inflation Essay

“Grade Inflation: Causes, Consequences, and Cure,” is an informational article written by a published author, Faieza Chowdhury, who attended Southeast University with a Masters in Science. In “Grade Inflation: Causes, Consequences, and Cure,” Chowdhury explains the meaning and aspects of Grade inflation. Chowdhury uses many other articles and authors’ opinions to write her article incorporating her own opinions and thoughts about the problems of grade inflation. This article explains why educators, academic institutions, and the public engage in the idea of grade inflation. This article also highlights and examines the various consequences of grade inflation. As well as she mentions some simple steps universities and colleges can take to resolve the problem of grade inflation.

Chowdhury explains how the grade point average (GPA) has increased significantly within the past 30 years. Chowdhury mentions that by viewing this differently, not only have the grade point averages increased but also the percentage of high grades awarded to students as well. Chowdhury believes that this would be a great achievement if the rising grade averages of students in colleges and universities reflected an increase in student learning. However, it does not because most educators today agree that the increase in grade point averages is not due to increased learning or an increase in students’ knowledge and skills.

Instead, the raising of the grade point average and higher grades is due to grade inflation and how much it has been rising throughout the years. Chowdhury believes that grade inflation is due to professors believing in student consumerism. This means that students believe that they should be treated as paying for their tuition means they are also paying for their grade in which they should receive an automatic A. A Grade point average used to be based on your knowledge, skills, and efforts in school. Now it is hard to tell who understands and puts in the effort in school for the higher grades and GPA. Sadly due to grades being inflated, it is harder to tell who truly deserves the grade and who does not anymore.

Grade inflation can hurt graduates, potential employers, the reputation of colleges/universities, and overall the well-being of society. She further explains that grade inflation can have negative long-term effects and consequences. She believes that steps need to be taken to solve this problem. Chowdhury believes that there needs to be new and improved strategies discussed to prevent grade inflation.

Link Between Inflation and Unemployment

Today, as thirty and forty years ago, economists debate how much unemployment is voluntary, how much involuntary, how much is a phenomenon of equilibrium, how much a symptom of disequilibrium; how much is compatible with competition, how much is to be blamed on monopolies, labor unions, and restrictive legislation, how much unemployment characterizes ‘full’ employment. A concept of full employment more congenial to economic theory is labor market equilibrium, a volume of employment which is simultaneously the amount employers want to offer and the amount workers want to accept at prevailing wage rates and prices. Forty years ago theorists with confidence in markets could believe that full employment is whatever volume of employment the economy is moving toward, and that its achievement requires of the government nothing more than neutrality, and nothing less After Keynes challenged the classical notion of labor market equilibrium and the complacent view of policy to which it led, full employment came to mean maximum aggregate supply, the point at which expansion of aggregate demand could not further increase employment and output. With a deflationary gap, demand less than full employment supply, prices would be declining or at worst constant. Expansion of aggregate demand short of full employment would cause at most a one-shot increase of prices. Postwar experience destroyed the identification of full employment with the economy’s inflation threshold. The natural rate is another full employment candidate, a policy target at least in the passive sense that monetary and fiscal policy makers are advised to eschew any numerical unemployment goal and to let the economy gravitate to this equilibrium. Full employment is once again nothing but the equilibrium reached by labor markets unaided and undistorted by governmental fine tuning. The presumption he challenged is that in competitive labor markets actual employment and unemployment reveal workers’ true preferences between work and alternative uses of time, the presumption that no one is fully or partially unemployed whose real wage per hour exceeds his marginal valuation of an hour of free time.

Orthodox economists found the observed stickiness of money wages to be persuasive evidence that unemployment, even in the Great Depression, was voluntary. Keynes found decisive evidence against this inference in the willingness of workers to accept a larger volume of employment at a lower real wage resulting from an increase of prices. His expected expansion to raise prices and lower real wages, but this expectation is not crucial to his argument. If it is possible to raise employment without reduction in the real wage, his case for calling the unemployment involuntary is strengthened. Why is the money wage so stubborn if more labor is willingly available at the same or lower real wage? Consider first some answers Keynes did not give. He did not appeal to trade union monopolies or minimum wage laws. Instead, Keynes emphasized the institutional fact that wages are bargained and set in the monetary unit of account. Money wage rates are, to use the Keynesian term, ‘administered prices’. That is, they are not set and reset in daily auctions but posted and fixed for finite periods of time. This observation led Keynes to his central explanation: Workers, individually and in groups, are more concerned with relative than absolute real wages. They may withdraw labor if their wages fall relatively to wages elsewhere, even though they would not withdraw any if real wages fall uniformly everywhere. Labor markets are decentralized, and there is no way, money wages can fall in any one market without impairing the relative status of the workers there. A general rise in prices is a neutral and universal method of reducing real wages, the only method in a decentralized and uncontrolled economy. Inflation would not be needed, we may infer, if by government compulsion, economy-wide bargaining, or social compact, all money wage rates could be scaled down together. Keynes apparently meant that relative wages are the arguments in labor supply functions.

Alchian and other theorists of search activity have offered a somewhat different interpretation, namely that workers whose money wages are reduced will quit their jobs to seek employment in other markets where they think, perhaps mistakenly, that wages remain high. Keynes’s explanation of money wage stickiness is plausible and realistic. All equilibrium prices, including money wage rates, should differ in the same proportion, while all real magnitudes, including employment, should be the same in the two equilibriums. The resistance of money wage rates to excess supply is a feature of the adjustment process rather than a symptom of irrationality. The other side of Keynes’s story is that in depressions money wage deflation, even if it occurred more speedily, or especially if it occurred more speedily, would be at best a weak equilibrator and quite possibly a source of more unemployment rather than less. What relevance has this excursion into depression economics for contemporary problems of unemployment and wage inflation? The issues are remarkably similar, even though events and Phillips have shifted attention from levels to time rates of change of wages and prices. Phillips curve doctrine is in an important sense the postwar analogue of Keynesian wage and employment theory, while natural rate doctrine is the contemporary version of the classical position Keynes was opposing. Let us adapt Keynes’s test for involuntary unemployment to the dynamic terms of contemporary discussion of inflation, wages, and unemployment. Associated with it is a path of real wages, rising at the rate of productivity growth. Consider an alternative future, with unemployment at first declining to a rate one percentage point lower and then remaining constant at the lower rate. Associated with the lower unemployment alternative will be a second path of real wages. Eventually this real wage path will show, at least to first approximation, the same rate of increase as the first one, the rate of productivity growth. The growth of real wages will be retarded in the short run if additional employment lowers labor’s marginal productivity. In any case, the test question is whether with full information about the two alternatives labor would accept the second one whether, in other words, the additional employment would be willingly supplied along the second real wage path. For Keynes’s reasons, a negative answer cannot necessarily be inferred from failure of money wage rates to fall or even decelerate. Actual unemployment and the real wage path associated with it are not necessarily an equilibrium. Rigidities in the path of money wage rates can be explained by workers’ preoccupation with relative wages and the absence of any central economy-wide mechanism for altering all money wages together. According to the natural rate hypothesis, there is just one rate of unemployment compatible with steady wage and price inflation, and this is in the long run compatible with any constant rate of change of prices, positive, zero, or negative. Only at the natural rate of unemployment are workers content with current and prospective real wages, content to have their real wages rise at the rate of growth of productivity. Along the feasible path of real wages, they would not wish to accept any larger volume of employment. Lower unemployment can arise only from economy-wide excess demand for labor and must generate a gap between real wages desired and real wages earned. The gap evokes increases of money wages designed to raise real wages faster than productivity. This intention is always frustrated, the gap is never closed, and money wages and prices accelerate. Older classical economists regarded constancy of money wage rates as indicative of full employment equilibrium, at which the allocation of time between work and other pursuits is revealed as voluntary and optimal. Their successors make the same claims for the natural rate of unemployment, except that in the equilibrium money wages are not necessarily constant but growing at the rate of productivity gain plus the experienced and expected rate of inflation of prices.

There are two conflicting interpretations of the welfare value of employment in excess of the level consistent with price stability. One is that additional employment does not produce enough to compensate workers for the value of other uses of their time. The alternative view, which I shall argue, is that the responses of money wages and prices to changes in aggregate demand reflect mechanics of adjustment, institutional constraints, and relative wage patterns and reveal nothing in particular about individual or social valuations of unemployed time vis-a-vis the wages of employment. On this rostrum four years ago, Milton Friedman identified the noninflationary natural rate of unemployment with “Equilibrium in the structure of real wage rates”. “The natural rate of unemployment”, – he said, “… is the level that would be ground out by the Walrasian system of general equilibrium equations, provided that there is embedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the costs of getting information about job vacancies and labor availabilities, the costs of mobility, and so on”. Presumably this Walrasian equilibrium also has the usual optimal properties; at any rate, Friedman advised the monetary authorities not to seek to improve upon it. In fact, we know little about the existence of the Walrasian equilibrium that allows for all the imperfections and frictions that explain why the natural rate is bigger than zero, and even less about the optimality of such an equilibrium if it exists. In the new microeconomics of labor markets and inflation, the principal activity whose marginal value sets the reservation price of employment is job search. It is not pure leisure, for in principle persons who choose that option are not reported as unemployed; however, there may be a leisure component in job seeking. Members of our own profession are adept at seeking and finding new jobs without first leaving their old ones or abandoning not-in-labor-force status.

In surveys of job mobility among blue collar workers in 1946-47, 25% of workers who quit had new jobs lined up in advance. A considerable amount of search activity by unemployed workers appears to be an unproductive consequence of dissatisfaction and frustration rather than a rational quest for improvement. Reynolds found that quitting a job to look for a new one while unemployed actually yielded a better job in only a third of the cases. Lining up a new job in advance was a more successful strategy: two-thirds of such changes turned out to be improvements.

Today, according to the dual labor market hypothesis, the basic reason for frequent and long spells of unemployment in the secondary labor force is the shortage of good jobs. In any event, the contention of some natural rate theorists is that employment beyond the natural rate takes time that would be better spent in search activity. Why do workers accept such employment? An answer to this question is a key element in a theory that generally presumes that actual behavior reveals true preferences. The answer given is that workers accept the additional employment only because they are victims of inflation illusion. One form of inflation illusion is overestimation of the real wages of jobs they now hold, if they are employed, or of jobs they find, if they are unemployed and searching. If they did not underestimate price inflation, employed workers would more often quit to search, and unemployed workers would search longer. The force of this argument seems to me diluted by the fact that price inflation illusion affects equally both sides of the job seeker’s equation. He over-estimates the real value of an immediate job, but he also overestimates the real values of jobs he might wait for. As a first approximation, inflation illusion has no substitution effect on the margin between working and waiting. It does have an income effect, causing workers to exaggerate their real wealth. In which direction the income effect would work is not transparent. Does greater wealth, or the illusion of greater wealth, make people more choosy about jobs, more inclined to quit and to wait? Or less choosy, more inclined to stay in the job they have or to take the first one that comes along? I should have thought more selective rather than less. Natural rate theory must take the opposite view if it is to explain why underestimation of price inflation bamboozles workers into holding or taking jobs that they do not really want. Workers are myopic and do not perceive, that wages elsewhere are, or soon will be, rising as fast as the money wage of the job they now hold or have just found. Consequently, they underestimate the advantages of quitting and searching. This explanation is convincing only to the extent that the payoff to search activity is determined by wage differentials. The payoff also depends on the probabilities of getting jobs at quoted wages, therefore on the balance between vacancies and job seekers. Quit rates are an index of voluntary search activity. The new microeconomics of job search, is nevertheless a valuable contribution to understanding of frictional unemployment. Does the market produce the optimal amount of search unemployment? Is the natural rate optimal? I do not believe the new microeconomics has yet answered these questions. An omniscient and beneficent economic dictator would not place every new job seeker immediately in any job at hand. The hypothetical planner would prefer to keep a queue of workers unemployed, so that he would have a larger choice of jobs to which to assign them. He would not make the queue too long, because workers in the queue are not producing anything. Of course, he could shorten the queue of unemployed if he could dispose of more jobs and lengthen the queue of vacancies. With enough jobs of various kinds, he would never lack a vacancy for which any worker who happens to come along has comparative advantage. Because of limited capital stocks and interdependence among skills, jobs cannot be indefinitely multiplied without lowering their marginal productivity.

Our wise and benevolent planner would not place people in jobs yielding less than the marginal value of leisure. Given this constraint on the number of jobs, he would always have to keep some workers waiting, and some jobs vacant. He certainly would be in efficient if he had fewer jobs, filled and vacant, than this constraint. This is the common sense of Beveridge’s rule-that vacancies should not be less than unemployment. Is the natural rate a market solution of the hypothetical planner’s operations research problem? According to search theory, an unemployed worker considers the probabilities that he can get a better job by searching longer and balances the expected discounted value of waiting against the loss of earnings.

A worker deciding to join a queue or to stay in one considers the probabilities of getting a job, but not the effects of his decision on the probabilities that others face. He lowers those probabilities for people in the queue he joins and raises them for persons waiting for the kind of job he vacates or turns down. Too many persons are unemployed waiting for good jobs, while less desirable ones go begging. Empirically the proposition that in the United States the zero-inflation rate of unemployment reflects voluntary and efficient job-seeking activity strains credulity. If there were a natural rate of unemployment in the United States, what would it be? It is hard to say because virtually all econometric Phillips curves allow for a whole menu of steady inflation rates. Estimates constrained to produce a vertical long-run Phillips curve suggest a natural rate between 5 and 6 % of the labor force. So let us consider some of the features of an overall unemployment rate of 5 to 6 %. First, about 40% of accessions in manufacturing are rehires rather than new hires. Their unemployment is as much a deadweight loss as the disguised unemployment of redundant workers on payrolls. This number declines to 25-30%, when unemployment is 4% or below. A 5-6% unemployment rate means that voluntary quits amount only to about a third of separations, layoffs to two-thirds. The proportions are reversed at low unemployment rates. Second, the unemployment statistic is not an exhaustive count of those with time and incentive to search. An additional 3% of the labor force are involuntarily confined to part-time work, and another 3-4% are out of the labor force because they ‘Could not find job’ or ‘Think no work available’ – discouraged by market conditions rather than personal incapacities. Third, with unemployment of 5-6% the number of reported vacancies is less than 1/ 2 of 1%. Vacancies appear to be understated relative to unemployment, but they rise to l2% when the unemployment rate is below %. At 5-6% unemployment, the economy is clearly capable of generating many more jobs with marginal productivity high enough so that people prefer them to leisure. The capital stock is in limitation, since 5-6% unemployment has been associated with more than 20% excess capacity. When more jobs are created by expansion of demand, with or without inflation, labor force participation increases; this would hardly occur if the additional jobs were low in quality and productivity. As the parable of the central employment planner indicates, there will be excessive waiting for jobs if the roster of jobs and the menu of vacancies are suboptimal. In summary, labor markets characterized by 5-6% unemployment do not display the symptoms one would expect if the unemployment were voluntary search activity. The only reason anyone might regard so high an unemployment rate as an equilibrium and social optimum is that lower rates cause accelerating inflation.

In other words, the economy has an inflationary bias: when labor markets provide as many jobs as there are willing workers, there is inflation, perhaps accelerating inflation. One rationalization might be termed a theory of stochastic macro-equilibrium: stochastic, because random inter sectorial shocks keep individual labor markets in diverse states of disequilibrium; macro- equilibrium, because the perpetual flux of particular markets produces fairly definite aggregate outcomes of unemployment and wages. It is an essential feature of the theory that economy-wide relations among employment, wages, and prices are aggregations of diverse outcomes in heterogeneous markets. The myth of macroeconomics is that relations among aggregates are enlarged analogues of relations among corresponding variables for individual house-holds, firms, industries, markets. Money wages do not adjust rapidly enough to clear all labor markets every clay. Excess supplies in labor markets take the form of unemployment, and excess demands the form of unfilled vacancies. At any moment, markets vary widely in excess demand or supply, and the economy, as a whole, shows both vacancies and unemployment.

Higher aggregate demand means fewer excess supply markets and more excess demand markets, accordingly less unemployment and more vacancies. In any particular labor market, the rate of increase of money wages is the sum of two components, an equilibrium component and a disequilibrium component. The first is the rate at which the wage would increase were the market in equilibrium, with neither vacancies nor unemployment. Why aren’t they eliminated by the very adjustments they set in motion? Workers will move from excess supply markets to excess demand markets, and from low wage to high wage markets. The overlap of vacancies and unemployment-say, the sum of the two for any given difference between them is a measure of the heterogeneity or dispersion of individual markets. The amount of dispersion depends directly on the size of those shocks of demand and technology that keep markets in perpetual disequilibrium, and inversely on the responsive mobility of labor. A central assumption of the theory is that the functions relating wage change to excess demand or supply are non-linear, specifically that unemployment retards money wages less than vacancies accelerate them. Nonlinearity in the response of wages to excess demand has several important implications. Linear wage response, on the other hand, would mean a linear Phillips relation. Second, given the overall state of aggregate demand, economy-wide vacancies less unemployment, wage inflation will be greater the larger the variance among markets in excess demand and supply. Of course, the rate of wage inflation will depend not only on the overall dispersion of excess demands and supplies across markets but also on the particular markets where the excess sup- plies and demands happen to fall.

An unlucky random drawing might put the excess demands in highly responsive markets and the excess supplies in especially unresponsive ones. Full long-run equilibrium in all markets would show no unemployment, no vacancies, and no unanticipated inflation. With unending sectorial flux, zero excess demand spells inflation and zero inflation spells net excess supply, unemployment in excess of vacancies. Both criteria automatically allow for frictional unemployment incident to the required movements of workers between markets; the no-inflation criterion requires enough additional unemployment to wipe out inflationary bias. I turn now to the equilibrium component, the rate of wage increases in a market with neither excess demand nor excess supply. It is reasonable to suppose that the equilibrium component depends on the trend of wages of comparable labor elsewhere. A ‘competitive wage’, one that reflects relevant trends fully, is what employers will offer if they wish to maintain their share of the volume of employment. TI his will happen where the rate of growth of marginal revenue product the com pound of productivity increase and price inflation is the same as the trend in wages. In some markets the equilibrium wage will be rising faster, and in others slower, than the economy-wide wage trend. A ‘natural rate’ result follows if actual wage increases feed fully into the equilibrium components of future wage increases. Phillips tradeoffs exist in the short run, and the time it takes for them to evaporate depends on the lengths of the lags with which today’s actual wage gains become tomorrow’s standards. Suppose there is a floor on wage change in excess supply markets, independent of the amount of excess supply and of the past history of wages and prices. Suppose, for example, that wage change is never negative; it is either zero or what the response function says, whichever is algebraically larger.

So long as there are markets where this floor is effective, there can be determinate rates of economy-wide wage inflation for various levels of aggregate demand. Markets at the floor do not increase their contributions to aggregate wage inflation when overall demand is raised. Nor is their contribution escalated to actual wage experience. The frequency of such markets diminishes, it is true, both with overall demand and with inflation. The floor phenomenon can preserve the Phillips tradeoff within limits, but one that becomes ever more fragile and vanishes as greater demand pressure removes markets from contact with the zero floor. It will be objected that any permanent floor independent of general wage and price history and expectation must indicate money illusion. The answer is that the floor need not be permanent in any single market. It could give way to wage reduction when enough unemployment has persisted long enough. With stochastic inter sectorial shifts of demand, markets are always exchanging roles, and there can always be some markets, not always the same ones, at the floor.

During the great contraction of 1930-33, wage rates were slow to give way even in the face of massive unemployment and substantial deflation in consumer prices. Finally in 1932 and 1933 money wage rates fell more sharply, in response to prolonged unemployment, layoffs, shutdowns, and to threats and fears of more of the same. I have gone through this example to make the point that irrationality, in the sense that meaningless differences in money values permanently affect individual behavior, is not logically necessary for the existence of a long-run Phillips trade-off. In full long-run equilibrium in all markets, employment and unemployment would be independent of the levels and rates of change of money wage rates and prices. But this is not an equilibrium that the system ever approaches. The economy is in perpetual sectorial disequilibrium even when it has settled into a stochastic macro-equilibrium. I suppose that one might maintain that asymmetry in wage adjustment and temporary resistance to money wage decline reflect money illusion in some sense. Such an assertion would have to be based on an extension of the domain of well-defined rational behavior to cover responses to change, adjustment speeds, costs of information, costs of organizing and operating markets, and a host of other problems in dynamic theory. These theoretical extensions are in their infancy, although much work of interest and promise is being done. Meanwhile, I doubt that significant restrictions on disequilibrium adjustment mechanisms can be deduced from first principles. Why are the wage and salary rates of employed workers so insensitive to the availability of potential replacements? One reason is that the employer makes some explicit or implicit commitments in putting a worker on the payroll in the first place. The employee expects that his wages and terms of employment will steadily improve, certainly never retrogress. He expects that the employer will pay him the rate prevailing for persons of comparable skill, occupation, experience, and seniority. He expects such commitments in return for his own investments in the job: arrangements for residence, transportation, and personal life involve set-up costs which will be wasted if the job turns sour. The market for labor services is not like a market for fresh produce where the entire current supply is auctioned daily. It is more like a rental housing market, in which most existing tenancies are the continuations of long-term relationships governed by contracts or less formal understandings. Employers and workers alike regard the wages of comparable labor elsewhere as a standard, but what determines those reference wages? There is not even an auction where workers and employers unbound by existing relationships and commitments meet and determine a market-clearing wage. If such markets existed, they would provide competitively determined guides for negotiated and administered wages, just as stock exchange prices are reference points for stock transactions elsewhere. In labor markets the reverse is closer to the truth. Wage rates for existing employees set the standards for new employees, too. The equilibrium components of wage increases, it has been argued, depend on past wage increases throughout the economy. In those theoretical and econometric models of inflation where labor markets are aggregated into a single market, this relationship is expressed as an autoregressive equation of fixed structure: current wage increase depends on past wage increases. The same description applies when past wage increases enter indirectly, mediated by price inflation and productivity change. The process of mutual interdependence of market wages is a good deal more complex and less mechanical than these aggregated models suggest. Reference standards for wages differ from market to market. The equilibrium wage increase in each market will be some function of past wages in all markets, and perhaps of past prices too. But the function need not be the same in every market. Wages of workers contiguous in geography industry, and skill will be heavily weighted. Imagine a wage pattern matrix of coefficient describing the dependence of the percentage equilibrium wage increase in each market on the past increases in all other markets. The coefficients in each row are non-negative and sum to one, but their distribution across markets and time lags will differ from row to row.

Money Growth and Inflation Essay

Part I. Considering how the data may be generated using economic theory.

    • The quantity theory of money suggests a relationship (in the long run) between money growth and inflation. Explain the economic intuition behind this relationship.

In the long run,

The quantity theory of money (M) means an increase in the quantity of money brings an equal percentage rise in the price level. Velocity of circulation (V) is the average number of times money is used annually to buy goods and services that makeup GDP. GDP is the price level (P) multiplied by real GDP (Y): GDP = PY. V is determined by: V = PY/M.

The equation of exchange becomes M if the quantity of money does not influence V or Y. This tells us that the price level in the long run is determined by M: P = M(V/Y), where (V/Y) is independent of M, meaning a change in M equals a proportional change in P.

The equation of exchange can also be expressed in growth rates: Money growth rate + Rate of velocity change = Inflation rate + Real GDP growth rate. The rate of velocity change, in the long run, is not affected by the money growth rate. The rate of velocity change is approximately zero. Therefore, in the long run: Inflation rate = Money growth rate – Real GDP growth rate.

In the long run, with full employment, real GDP equals potential GDP, so the real GDP growth rate equals the potential GDP growth rate. The growth rate might be influenced by inflation but is likely small and therefore assume it is zero. Inflation is correlated with money growth as the real GDP growth rate is given and does not change when the rate changes.

Part II. Describing the data

    • Describe the two variables (i.e. Inflation and money growth). For each variable, use an appropriate chart (i.e. histogram) and the following descriptive statistics to support your answer: mean, standard deviation, maximum, minimum.

Money growth is defined as Money growth = Inflation + Real GDP growth. Money growth is a direct cause of inflation.

The diagram above shows a histogram of Money Growth from the Coursework Data for 2019-20. One measure of central location is the mean. The mean for money growth is 14.95(424) to 2 decimal places. The standard deviation, a measure of dispersion, for the money growth data is 6.80 (2. d.p), which indicates a low amount of variation, meaning the values tend to be close to the mean for money growth. The maximum number in the data recorded for money growth is 33.34 (2. d.p). While the minimum number for money growth is 4.34 (2. d.p).

Inflation is defined as a constant increase in the general price level in an economy, resulting in a rise in living costs as the prices of goods and services increase. This means the price level is constantly rising as money loses value.

The diagram above shows a histogram of Inflation from the Coursework Data for 2019-20. One measure of central location is the mean. The mean for inflation is 5.98 to 2 decimal places. The mean for inflation is significantly lower than the mean calculated for money growth above. The standard deviation for inflation is 3.81 (2. d.p), which indicates a low amount of variation, so the values tend to be close to the mean. The standard deviation is also lower than the standard deviation for money growth. The maximum and minimum for inflation are also substantially lower than for money growth.

Produce an XY scatter chart with inflation on the y-axis and money growth on the x-axis. Describe the key features of this chart. Calculate (and interpret) the correlation between the two variables.

The correlation between inflation and money growth is 0.73, therefore, the XY scatter chart above shows the relationship between inflation and money growth has a positive correlation. The correlation is positive when the values increase together, and the correlation is negative when one value decreases as the other increases. The XY scatter chart is suitable for examining the relationship between pairs of variables and in this instance the relationship between inflation and money growth from the data set ‘Coursework data 2019-20’.

Part III. Exploring relationships within your data

4. Consider the linear equation below.

    • Where is inflation, is money growth, and are fixed parameters, and is a standard error term. Using the economic theory outlined in (1), explain the statistical hypotheses that would be sensible for the values of the parameters where the dependent variable, is the independent variable, and the growth rate of inflation expected if money growth () was zero. Would expect a positive relationship for the parameter.

Estimate the parameters and using observed values of Y and X and obtain a generalized relationship between Y and X. We identify estimates for, and as, respectively, and. To analyze whether X determines Y, need to test the hypothesis that. is essentially the value of Y when X=0 and is the unit change in Y for a unit increase in X.

A two-sided test, where, if I can reject the hypothesis that, then X explains Y. Testing at a 95% confidence interval. If the confidence interval does not include 0 – we can reject the hypothesis at a 5% significance level.

5. Run a regression for the equation displayed in (4).

    • Interpret the results of this regression. Your answer should consider relevant economic theory, the estimated parameters, the t-statistics/p-values for the estimated parameters, the hypotheses you stated in (4), and the statistics.

The hypothesis stated above is a two-sided test, testing at the 95% confidence interval.

The confidence intervals are as stated:

As 0.334 (lower 95%) > 0.0000, we can reject at the 5% significance level as the 95% confidence interval does not include 0. This means that Y, inflation, explains X, money growth.

Coefficients’ estimate

Standard error

t-statistic

p-value (Sig.)

Lower 95%

Upper 95%

Constant

    • -0.162
    • 0.629
    • -0.257
    • 0.798
    • -1.410
    • 1.087

Money growth

    • 0.410
    • 0.038
    • 10.708
    • 0.000
    • 0.334
    • 0.487

Both and rejecting at the 5% significance level suggest a positive and significant relationship. Therefore, is consistent with the expectation from the quantity theory of money that there is a relationship, in the long run, between money growth and inflation. The coefficients’ estimate, is 0.410, which means that one unit of change in inflation represents a 0.41 % change in money growth.

This means the linear equation becomes. For example, if: And if: Therefore, the difference, 0.41, represents the change in Y when you change one unit of X. This is the change in inflation when there is one unit of money growth.

To examine if a single explanatory variable has explanatory power, the t-statistic test is used. However, to test if all the explanatory variables have any explanatory power for the dependent variable, the test is used. This is done through the p-value.

The p-value can also be used to work out the confidence level: The p-value can be used to determine if the relationship observed in the sample can exist in the larger population. The F-statistic is 114.658 and the P-value is 0.000, and therefore below the 5% significant level, so evidence to reject the null hypothesis and conclude. Thus, no correlation is made, so there is no association between the changes in inflation and the shifts in money growth, meaning there is insufficient evidence to conclude there is an effect at the population level.

Provides an assessment of the model’s explanatory power. Adding (potentially) relevant variables into a model would tend to increase as more of the variation in Y would be explained. The statistic is 0.537, which measures the fit of the regression model, The fit of the regression model is good as it is closer to 1 than to 0. The variation in X, money growth, explains 53.7% of the variation in Y, inflation. If so, then X does not have any explanatory power for Y. However, as the model above shows, there is some explanatory power at 53.7%. Although a high obtained from a few observations might not be of significance, a low from many observations might indicate a small but genuine explanatory power.

Part IV. Reflect upon your analysis

    • 6. Identify and briefly discuss potential limitations of your econometric model (e.g. aspects related to sample size, possible omitted variables, etc.)

The sample should be representative of the population, so be as large as possible. The sample size is 101 countries, however, there are more than 101 countries in the world. The sample size will affect how close is to as having more data points will improve the accuracy of the estimation. The problem with the statistical properties, which should be representative of the population, is unknown so we can only estimate and make assumptions. However, by calculating the confidence interval and hypothesis tests we can gauge how accurate our estimates are. The spread of prediction errors will affect how close is to as smaller errors will improve the accuracy of the estimates. The spread of values of the explanatory variable (X) will also affect how close is to as having a larger spread improves the accuracy of estimation.

References

    1. Koop, G., 2013. Analysis of Economic Data. 4th edition.
    2. Parkin, M., Powell, M., and Matthew, K., 2014. Economics. 9th edition. Harlow: Pearson Education UK.
    3. Sloman, J., Garratt, D., and Guest, J., 2018. Economics. 10th edition. Harlow: Pearson Education Limited.
    4. Inflation and Money Growth relationship

Objective Inflation in Philippines Essay

As obvious as it seems, the world is run by money. Businesses are established to earn money. Roads and other infrastructures were built because of money. People work because of money. This is of course in a metaphorical sense, but one cannot deny the fact that almost everything is valued through money and by money. In this economy, in this society, the involvement of money is extensive. Without that certain buying power, an individual cannot suitably fulfill his or her own needs and wants. This insufficiency of buying power is greatly seen in those people living in poverty.

In a recent study by the Philippine Statistics Authority in 2015, 21.9% or 1 in 5 Filipinos live in poverty. That is significantly a huge number of the country’s population who struggle to earn enough money for their basic living. With this, we come to focus on one of its many causes, which is the rise of the inflation rate of the country. Last September 2018, the country experienced the highest inflation rate in the past 9 years, with 6.4% (PSA, 2018). However, it has declined to 4.4% last January this current year, but still considerably high. Furthermore, an in-depth understanding of inflation must be grasped first—what is inflation, its causes and effects, and how it relates to poverty—to ascertain its impact and significance on the issue and its resolution.

First, what is inflation? According to Mr. Amador T. Sendin (2019), Chief Financial Officer (CFO) of Macroasia Corporation and also a CPA, the general meaning of inflation is that it is driven by the expansion of the supply of money more rapidly than the supply of goods and services. The value of money declines and prices rise. Unlike when its supply is at a constant or a slow, steady rate, the value of money will be relatively stable. This is directly related to the law of supply and demand. According to Bartolome (2018), the computation of inflation is based on the Consumer Price Index (CPI) of the economy. The CPI indicates the change in the average prices of primary goods and services normally bought by a household. It is the most common tool that is used in the calculation of the purchasing power of the peso and the inflation rate (PSA, 2018).

In the case of the Philippines last year, the impact of the Train Law, where additional taxes were imposed on commodities, resulted in an increase in prices of the primary inputs to production. Processed goods became more expensive and people had to prioritize purchases and cut consumption (Ibon, 2018). Oil prices rose based on global supply and demand concerns especially since the Philippines is only a net importer of oil. Weather is also a disruptor. During the months when the country has experienced severe typhoons, commodities were scarce, especially agricultural products, causing prices to spike. Consequently, its major effect was it brought higher prices, not only to the masses but also to businesses, by their operating costs going higher. If the costs would not be able to pass on to the consumers, this reduces the net income of the businesses. This, in turn, will result in some businesses cutting expenses as well as salaries and wages, therefore causing unemployment. For people, especially those whose earnings are limited, inflation causes the prices of goods to be bought to be higher. Thus, people can only buy less. The effect came from the top until it came down to the consumers, especially the poor with low buying power, who are the primary sufferers. So, in simple terms, how does this affect an individual? It means one needs to pay more for the same goods and services.

Therefore, how does this inflation relate to or contribute to poverty? In a study conducted by GP Poverty & Equity (2017), in general, inflation and poverty have an indirect yet impactful relationship. It has been proven that higher inflation rates only worsen the poverty issue in a country unlike those with low inflation rates tend to have a lower poverty incidence. For instance, according to Sheridan (2019), the inflation of Japan was only 0.3% in December 2018. Moreover, it is also evident that Japan’s economy is developed and its poverty incidence is low. In comparison to the Philippines, this is the exact opposite as inflation is a major issue. In the past year, the effect of inflation has been truly felt—even the people in the middle class have experienced the rise of commodity prices, what more to those people in poverty? In an article written by Ordinario (2018), he said that the current rise of inflation in today’s time is consistent with the findings of a 2008 study by Asian Development Bank (ADB) economist Hyun Son. That study stated that a 10% increase in the prices of food could lead to 2.3 million poor Filipinos, while the same increase in non-food prices could lead to an addition of 1.7 million to poverty. This only means that as the inflation goes higher, more Filipinos will be plunged into poverty. The government is doing poverty reduction measures, but it seems there are still many first-in-line problems that must be taken into consideration first—and the issue of inflation is only one of many. In an article by Rivas (2018), the Philippines was warned by the World Bank, as Rong Quan, World Bank Senior Economist, said that persistently high inflation slows down the poverty reduction measures of the country, which in turn may only make the efforts wasted.

That being said, the question for resolution is asked, what is the mere solution to this? It is simple: to lower the prices of goods and services. A very direct and brief statement for a resolution but still branches out to several points to achieve the goal of controlling inflation to lessen poverty. First, is the proper control of the country’s monetary policy. The government must efficiently circulate the flow of money toward the citizens to avoid overprinting and debt-taking from creditors. Second is the strict implementation and proper usage of the fiscal policies of the government. These fiscal policies refer to the taxes collected as government funds. These funds must be put into projects for poverty alleviation such as free education, housing, and low-cost goods and services. Third, the government must already have the capability to export its goods. Nevertheless, if exportation is not extensively possible, the government can adhere to a faster importation of basic goods to garner a larger supply for the masses. This, in turn, will force the market to lower its prices since the supply is large enough for the demand. Ultimately, the greatest error and misconception that people think of as a way out of poverty is—the increase in salaries and wages. This is entirely counter-productive to the goal in the long run. As agreed upon by Sendin (2019), said that these salaries and wages will always be seen by people as wanting or lacking. Increasing this item just increases the cost base for the pricing of goods, and as prices increase, the inflationary wheel rotates endlessly. The reason people are complaining about the buying power of their wages is that the basic services–food, clothing, shelter, education, health, etc. are simply becoming more expensive, often due to the failure of the government. The government should do more to increase the non-wage benefits such as coverage for health insurance, free education, lower power and transport costs, etc. A better government implementing more programs beneficial to the poor or uplifting the general living conditions can better support workers. In such a situation, the masses will see no justification for the clamor that wages are insufficient.

In conclusion, the issue of inflation is one of the great foundations of the larger issue, which is poverty. Quoting Uy (2018) in her article “Thinking Beyond Politics” she said, “The inflation mess is the failure of our top officials to coordinate the appropriate policy response to several long-standing issues. The administration has lined up several grand plans within its term, but unless it manages to address these issues, it will only risk biting more than it can chew.” It means that only those in power can directly and immediately address the problems in inflation and resolve them. Hence, the only job of the people is to adhere to these implemented policies, which in the hope is better, by those in power.

Venezuela and US Inflation Essay

Economic Situation

• Foreign trade

The United States supplies more than one-third of Venezuela’s food imports. Recent government import policies have led to a shortage of goods throughout the country. During the crisis in Bolivarian Venezuela, Maduro decided to purchase hundreds of military vehicles to be used against large waves of protests instead of purchasing goods for Venezuelans, allocating only 15% of the necessary amount of funds to buy goods for supermarkets.

• International assistance

In January 2015, Maduro toured countries in Asia seeking support following the steep decline in oil prices since June 2014, asking for financial agreements and the cut of production by OPEC. Despite statements by Maduro saying that multibillion-dollar agreements were made, few details were given, oil prices fell another 8% and his tour was described as a failure.

In May 2016, the National Assembly passed a law compelling the executive branch and Nicolás Maduro to accept foreign aid for healthcare and medical supplies, including medicines that have experienced supply shortages. This law intends to offset the decline in services and supply shortages. Every citizen and resident in Venezuela is entitled to healthcare as both a human and constitutional right and guaranteed by law.

• Economic sanctions

Economists have stated that shortages and high inflation in Venezuela began before US sanctions were directed toward the country. The Wall Street Journal says that economists place the blame for Venezuela’s economy shrinking by half on ‘Maduro’s policies, including widespread nationalizations, out-of-control spending that sparked inflation, price controls that led to shortages, and widespread graft and mismanagement.’ The Venezuelan government has stated that the United States is responsible for its economic collapse. The HRW/Johns Hopkins report noted that most sanctions are ‘limited to canceling visas and freezing assets of key officials implicated in abuses and corruption. They in no way target the Venezuelan economy.’ The report also stated that the 2017 ban on dealing in Venezuelan government stocks and bonds allows exceptions for food and medicine and that the 28 January 2019 PDVSA sanctions could worsen the situation, although ‘the crisis precedes them’. The Washington Post stated that ‘the deprivation long predates recently imposed US sanctions’.

On 9 March 2015, Barack Obama signed and issued an executive order declaring Venezuela a national security threat and ordered sanctions against Venezuelan officials. The sanctions did not affect Venezuela’s oil company and trade relations with the US continued. In 2017, Trump’s administration imposed additional economic sanctions on Venezuela. In 2018, the United Nations High Commissioner for Human Rights (OHCHR) documented that ‘information gathered indicates that the socioeconomic crisis had been unfolding for several years before the imposition of these sanctions’.

According to the Wall Street Journal, new 2019 sanctions—aimed at depriving the Maduro government of petroleum revenues—are the most significant sanctions to date, and are likely to affect the Venezuelan people. In 2019, former UN rapporteur Alfred de Zayas asserted that US sanctions on Venezuela were illegal as they constituted economic warfare and ‘could amount to ‘crimes against humanity’ under international law’. His report, which he says was ignored by the UN, was criticized by the Latin America and Caribbean program director for the Crisis Group for neglecting to mention the impact of a ‘difficult business environment on the country’, which the director said ‘was a symptom of Chavismo (Chavez’s ideology) and the socialist governments’ failures’, and that ‘Venezuela could not recover under current government policies even if the sanctions were lifted.’

• Currency

The growth in the Central Bank of Venezuela’s money supply accelerated during the beginning of President Maduro’s presidency due to massive currency printing, which caused more price inflation in the country. The money supply of the Bolivar in Venezuela increased by 64% in 2014, three times faster than any other economy observed by Bloomberg at the time. Due to the rapidly decreasing value of the Bolivar Fuerte, Venezuelans jokingly called the currency ‘bolivar muerto’ or ‘dead bolivar’.

In September 2014, the unofficial exchange rate for the Bolivarian Cúcuta reached 100 Bs.F. per 1 USD. In May 2015, the Bolivar lost 25% of its value in a week, with the unofficial exchange rate being at 300 Bs.F. per 1 USD on 14 May and reaching 400 Bs.F. per 1 USD on 21 May. The Bolivar dropped sharply again in July 2015, passing 500 Bs.F. per 1 USD on 3 July and 600 Bs.F. per 1 USD on 9 July. By February 2016, the unofficial rate reached 1,000 Bs.F. per USD.

In November 2016, the Bolivar saw its largest monthly loss of value ever. The Bolivar to the United States dollar conversion rate passed the 2,000 Bs.F. per 1 USD on 21 November 2016, reaching nearly 3,000 Bs.F. per 1 USD only days after it passed the 2,000 mark. On 29 November 2016, the conversion rate increased to over 3,000 Bs.F. per 1 USD. The Bolivar lost over 60% of its value.

The main currency of Venezuela since 20 August 2018 has been the bolívar soberano (sovereign bolivar).

It will replace the bolívar fuerte after a transition period. The primary reason for replacement is at a rate of 1 Bs.S. to 100,000 Bs. F was hyperinflation.

• National cryptocurrency

In December 2017, Nicolas Maduro announced that Venezuela would issue an oil-backed state cryptocurrency called the ‘Petro’ in an attempt to shore up its struggling economy.

Effects of flawed policies

1. Economic crisis: three years of recession

Venezuela is in its third year of recession. Its economy is expected to contract 10% this year, according to the International Monetary Fund. The IMF forecasts Venezuela will be in recession until at least 2019.

While the economy shrinks, the price of goods is skyrocketing.

2. Venezuela’s broken engine: oil

Things got really bad when oil prices started to plunge in 2014. Venezuela has the world’s largest oil reserves, but the problem is that oil is the heart of Venezuela’s economy. It makes up over 95% of Venezuela’s revenue from its exports. If it doesn’t sell oil, the country doesn’t have money to spend.

Oil prices were over $100 a barrel in 2014. In 2016, they hovered around $50 a barrel, after dropping as low as $26 earlier this year.

The problem is that Venezuela has not taken care of its cash cow. It has squandered opportunities to invest in its oilfields when times were good. Also, because the country has neglected the upkeep of its oil facilities, production has dropped to a 13-year low.

Venezuela’s state-run oil company, PDVSA, hasn’t paid the companies that help extract its oil, such as Schlumberger (SLB). In the spring, Schlumberger and other companies dramatically reduced operations with PDVSA, citing unpaid bills.

PDVSA warned that it could default on its debt if bondholders didn’t accept new payment terms. Just enough investors accepted a new deal that will allow PDVSA to likely avoid default that year. However, experts say it has only delayed a default by a small period.

3. Soaring food prices & broken hospitals

Venezuela’s food shortages became extremely severe from 2016 onwards. Venezuelans went weeks, in some cases months, without basics like milk, eggs, flour, soap, and toilet paper.

Despite a crashing currency and falling oil revenue, the government continued enforcing strict price controls on goods sold in the supermarkets. It forced food importers to stop bringing in virtually everything because they would have had to sell it for a major loss.

In the first half of 2016, food imports were down by nearly 50% from the same time a year ago, according to several estimates.

Only recently has the government stopped enforcing price controls, and food has returned to supermarket shelves. However, prices are so high that few Venezuelans can afford the food.

Medicine remains in short supply too. Venezuelans hunt for penicillin and other remedies at pharmacies everywhere, often without any success. The country’s public hospitals have fallen apart, causing people, even infants, to die due to the scarcity of basic medical care.

4. Running out of cash and gold

Venezuela is running out of cash quickly. It doesn’t have enough money to pay its bills for too long.

The math just doesn’t add up: It owes $15 billion between now and the end of 2017, while the nation’s central bank only has $11.8 billion in reserves. At the same time, Venezuela’s only other cash source, PDVSA, is pumping less oil and risking default.

Most of its reserves are in the form of gold. So, to make debt payments this year, Venezuela has shipped gold bars to Switzerland.

China used to bail out Venezuela and loan it billions of dollars. But even China has stopped giving its Latin American ally more cash.

5. Hyperinflation

From 2006 to 2012, the government of Hugo Chávez reported decreasing inflation rates during the entire period. Inflation rates increased again in 2013 under Nicolás Maduro and continued to increase in the following years, with inflation exceeding 1,000,000% by 2018. In comparison to previous hyperinflationary episodes, the ongoing hyperinflation crisis is more severe than those of Argentina, Bolivia, Brazil, Nicaragua, and Peru in the 1980s and 1990s, and that of Zimbabwe in the late 2000s.

In 2014, the annual inflation rate reached 69%, the highest in the world. In 2015, the inflation rate was 181%, again the highest in the world and the highest in the country’s history at the time. The rate reached 800% in 2016, over 4,000% in 2017, and about 1,700,000% in 2018, with Venezuela spiraling into hyperinflation. While the Venezuelan government ‘had essentially stopped’ producing official inflation estimates as of early 2018, inflation economist Steve Hanke estimated the rate at that time to be 5,220%. In April 2019, the International Monetary Fund estimated that inflation would reach 10,000,000% by the end of 2019. The Central Bank of Venezuela (BCV) officially estimates that the inflation rate increased to 53,798,500% between 2016 and April 2019.

Lessons learned

Many lessons can be learned from Venezuela’s crisis.

    • Belief in incentives more than ideology: You cannot create a new economy out of a flurry of decrees. A law that forces companies to produce and sell goods at a loss with unrealistic price controls will lead companies to stop producing.
    • Learn fiscal restraint: Having a lot of money poorly managed is worse than having less money. Saving and investing wealth for the future is extremely important. Also, the crowding-out effect of government spending has to be taken into account.
    • Printing money at will is harmful: Economists can go back and forth about the roots of inflation, an academic debate in countries where inflation is just a few percentage points and where the economy is soundly managed. If you print money with no backing by another currency or real economic growth then, inflation will speed up quickly. Venezuela has the highest inflation on earth.
    • Excessive Nationalisation/Expropriation is disastrous: Firms were often expropriated on a whim, and state-owned endeavors were launched without careful thought or planning. This led to a bloated bureaucracy, growing corruption, and a long-term decline in key sectors. State-owned enterprises often ended up in the hands of corrupt bureaucrats who made them into their domains, and then milked them dry. A key example of this was in 2010 when Chavez launched an offensive in agriculture by expropriating hundreds of farms and food industries. Given that these enterprises were often undercapitalized and unproductive, state intervention was necessary. But most of the firms were then handed over to bureaucrats who had little preparation or oversight. The result was complete mismanagement, and a drastic decline in food production thereafter.

Grade Inflation Essay

“Grade Inflation: Causes, Consequences, and Cure,” is an informational article written by a published author, Faieza Chowdhury, who attended Southeast University with a Masters in Science. In “Grade Inflation: Causes, Consequences, and Cure,” Chowdhury explains the meaning and aspects of Grade inflation. Chowdhury uses many other articles and authors’ opinions to write her article incorporating her own opinions and thoughts about the problems of grade inflation. This article explains why educators, academic institutions, and the public engage in the idea of grade inflation. This article also highlights and examines the various consequences of grade inflation. As well as she mentions some simple steps universities and colleges can take to resolve the problem of grade inflation.

Chowdhury explains how the grade point average (GPA) has increased significantly within the past 30 years. Chowdhury mentions that by viewing this differently, not only have the grade point averages increased but also the percentage of high grades awarded to students as well. Chowdhury believes that this would be a great achievement if the rising grade averages of students in colleges and universities reflected an increase in student learning. However, it does not because most educators today agree that the increase in grade point averages is not due to increased learning or an increase in students’ knowledge and skills.

Instead, the raising of the grade point average and higher grades is due to grade inflation and how much it has been rising throughout the years. Chowdhury believes that grade inflation is due to professors believing in student consumerism. This means that students believe that they should be treated as paying for their tuition means they are also paying for their grade in which they should receive an automatic A. A Grade point average used to be based on your knowledge, skills, and efforts in school. Now it is hard to tell who understands and puts in the effort in school for the higher grades and GPA. Sadly due to grades being inflated, it is harder to tell who truly deserves the grade and who does not anymore.

Grade inflation can hurt graduates, potential employers, the reputation of colleges/universities, and overall the well-being of society. She further explains that grade inflation can have negative long-term effects and consequences. She believes that steps need to be taken to solve this problem. Chowdhury believes that there needs to be new and improved strategies discussed to prevent grade inflation.

Evaluate Government Policies to Reduce the Rate of Inflation

Inflation

Inflation refers to the progressive rise in the prices of goods and services. This makes living costly and results in a reduction in money’s power to purchase14. The rate of inflation is the adjustment in the index of price in a single year to a new one expressed in percentages. A reduction in the rate of inflation is not directly proportional to the items’ prices1.

Consequently, it leads to high unemployment rates, lowered standards of living, reduced balance of payment, and obstructed economic growth8. It is currently set at 2% in Britain2. To control the inflation, the causes must be known and dealt with. This paper argues that policies adopted by a government may be more detrimental than helpful to its economy.

The major factors that can trigger inflation include the availability of items for purchase against the command of the same, and vice versa. This is in addition to domestic and peripheral occurrences. Moreover, continuous variation in the rate of replacement of different currencies during trade can also influence inflation12. These also make yearly prediction of the rate of inflation intricate.

The policies adopted by a government should help it realise high rates of employment, improved standards of living, reduced inflation, and continuous economic expansion9. This essay argues the need of the government to minimise cumulative demand and increase collective supply to facilitate this10.

  1. Economic/monetary policy requires the government to initiate moments where the rates of interest shoot, thus, minimising prospective expenditures15. This is purposed at obtaining minimum prices of imports and attractive exports. The results would be positive because the fixed high interest rates may in turn lead to increase in the value of the rate of exchange6. It also involves instances where money circulation is minimised. It results in money scarcity and, thus, a decrease in aggregate demand. High rates of interest stimulate inflation7.
  2. A policy that is concerned with making items available as the objective of this policy is to sustain reduced costs1. It is ensured by a boost in production through diminution in levies, creating opportunities for more rival firms that would increase supply and cause a fall in prices. Furthermore, there is a decrease in company duties that in turn would encourage novelty2. This causes demand for increase in remuneration. In order for employers to keep up with this, they require to reduce their workforce that leads to unemployment.
  3. Financial/fiscal policy concentrates on a demand as a way to control inflation. It is done by minimising the rate of expenses on communal and value goodsand raising interests3. It is also achieved through increasing express taxes, thereby, resulting in a decline in actual disposal earnings. This would in the short term reduce demand and, thus, price cuts. However, the effects of government’s withdrawal or reduction in public expenditure would affect the market and hamper development4. In addition, high taxation would leave consumers with less money to spend, thereby, influencing their living standards negatively. There would be an increase in unemployment since most firms would lay down workers to keep up with the tough economic trends. This policy affects investments and expansion of industries, which in turn reflects negatively on the economy. Contrary to the expectation, instead of controlling inflation, unemployment would increase. This has similar or even worse economic impacts than inflation5.
  4. A policy concerned with the rate of exchange: improved exchange rates cause reduction in the price of imports13. It hinges on the aggression of the government. This in turn reduces production cost, which calls for a fall in prices and, thus, minimised profit margins. The result is improved economy since there are lower import costs and higher export charges. However, this largely depends on the countries sustained balance of payments.

It is essential to note that inflation has a way of negatively affecting other macroeconomic components such as employment and balance of payment3.

A government needs to know how to juggle the above policies in order to keep its economy healthy. This is because the first and third policies, in a bid to control inflation, would lead to other macroeconomic predicaments such as a lack of employment. It can be concluded that the weight of inflation would then greatly press on this group of people. It, therefore, calls for adoption of the right policy instruments.

Short-Run Phillips Curve before and after Expansionary Policy, with Long-Run Phillips Curve (NAIRU)7

List of References

  1. Adam Smith Economics Tuition Agency, Inflation, 2009. Web.
  2. WEB*pedia, Inflation. Amos WEB LLC, 2000-2013. Web.
  3. Baxter, M., ‘the role of expectations in stabilizing policy’, journal of monetary economics,Vol. 15, University of California, North Holland. 1985, pp 343-362
  4. Broadly, D., A low and stable rate of inflation, 2013. Web.
  5. Corbo, V., ‘Reaching One digit inflation: the Chilean experience’, Journal of applied economics, Vol 1, No. 1, 1998.pp 123- 163.
  6. Feldstein, M. S., ‘The welfare cost of permanent inflation and optimal short run economic policy’, Journal of political economy, vol 87, no.4, University of Chicago press, 1979. Pp 749.
  7. How the Phillips curve relates to aggregate supply and demand. Web.
  8. Lawrence, J., ACopp& S Stoddard, AQA economics AS: Student Book: AS: Exclusively endorsed by AQA, Nelson Thornes Ltd, 2008.
  9. Margetts, S., . Web.
  10. Pettinger, T., , 2007. Web.
  11. Policies to control inflation. Web.
  12. Riley, G., AS Macroeconomics/ International economy: Government macroeconomic policy, Eton College, 2006. Web.
  13. Riley, G., , 2010. Web.
  14. Riley, G., , 2012. Web.
  15. Tutor2u, economics policies to control inflation. Web.

China Currency Policy and Inflation

This paper presents a discussion on inflation in China and its currency policy. It is imperative first to define the technical term, inflation, and then proceed to analyze various dynamics of inflation in China.

The sphere of inflation in China relates to the consumer price index which has recorded a rising orientation in the near past. Economic expansion extending from Australia to South Korea has adversely affected trade and development in China. This factor will be analyzed in-depth. Furthermore, money supply, M2, plays a significant role in perpetuating higher inflation.

Incorporated in the discussion is the price inflation of producers which recorded an upward trend at the beginning of the year. To reduce the adverse effects of inflation, the essay samples out the currency policy as instituted by the Chinese government. Both fiscal and monetary policy instruments are available to be used by government in eliminating inflationary effects.

Inflation in China

A continuous increase in price of common goods including industrial products and raw materials is termed as inflation. The price index of consumers with domestic GDP deflator shows inflation. Inflation can either result from cost-push inflation or wage pull inflation. For a business experiencing rising cost of production, it has to increase their prices if profits are to be realized (McConnell, 300).

Among the reasons why the costs rises is the costly price of imported raw materials. These high costs of raw materials results from inflation in countries that depends on exports of the expensive commodities. A wage price spiral is another element causing inflation in a country. If people are expecting the prices to rise in the future, they will decline fewer wage because they are aiming to protect their real purchasing power.

At the beginning of March this year, Inflation in China recorded a level of 2.4 % (Miller, 23). This was a lower intensity of inflation as compared to 2.7 % inflation rate in January. An investigation into the consumer price index reveals a rise to 2.2 % during the first part of the month. Measurement done by the national bureau of statistics details increased price of the producers by 6.4 % which is likely to cause inflation.

Economies of South Korea to Australia

Rapidly developing economic activities beginning South Korea to Australia is a disincentive to trade in China. Subsequently economic activity tightens. Countries in the world especially the sub-Saharan countries, are resorting to trade with these developed economies having favorable terms of trade.

Money supply, M2

A measure of supply of money rose by approximately 25 %. The increase was from a new disbursement program of $ 103 billion liquidity resulting from a stimulus package of $ 585 billion (McEachern, 19). Although the stimulus package was aimed at jumpstarting the economy, their side effect is a decline in values of real estate and equity (Krugman 84).

Money in circulation has eroded access to businesses and consumers capital. The increase in money supply is not good for the stability of a nation since it creates demand. High demand for goods and services generate deficits and a subsequent price change. This leads to inflation.

Industrialization and fast growing pace of development

The present trend of industrialization and a fast pace of economic development has pulled many people from their rural place to the urban centers where production of goods and services for exports is taking place (McConnell, 229).

The movement into the city center with an aim of assuming city life created middle class (social class) which can access higher wages while consuming in relation to their earnings. This observation has the effect of driving upward the prices of consumer goods and energy due to higher demand. In the same note, its competitive strategy of taking advantage of cheap and readily available labor to manufacture and export more than US and Germany has lead to higher prices of raw materials.

If the cost of raw materials expands then the cost of output will be magnified. The earlier mentioned cost push inflation is likely to creep into the economy. Investment idea in China where steel has a growing demand reduces exports and ultimately increase price in the international market. The expectation here is that local steel manufactures will increase their prices as international price level expands.

Measures to deal with inflation in China

Policy makers in China have increased the requirements for reserve bank to about 15%. This increase reduces the amount of money available for lending by financial institution. It is also in the policy that Renminbi (RMB) will be allowed to appreciate at a higher rate. If the interest rate is increased by the central bank, few people will obtain loans consequently reducing demand in a fast growing economy (Fireside, 30).

A recent observation was a weakening USD whilst the Chinese currency also weakened against the Euro which forced Europe to exert pressure on Yuan to appreciate. A Price control measure is also used by the Chinese government to control increase in prices.

Chinese currency policy

In the year 1949, the communist issued Renminbi with an aim of curbing hyperinflation. A study by McEachern (31) reveals that “The convertibility of renminbi is based only on the current account while it is not convertible on the capital account”. It has been the goal of Chinese government to make the currency fully convertible but in view of handling cross border movement of hot money, full convertibility remains a mirage (McConnell, 301).

The Chinese currency policy emphasizes on pegging the value of RMB against the USD. This policy was highly regarded during the financial crisis in Asia since it avoided devaluation competitively. However, the policy was criticized in 2003 when the exports reduced due to a fall in USD. Although the Chinese government was under pressure from US to increase the value of its currency, fear was on exposing local commercial bank to currency crisis.

The consequences of revaluating Renminbi are complex in nature. If Yuan appreciates, few treasury bonds from US will be bought consequently raising its price. This will lead to a reduction in US economic development. The subsequent weakening of dollar can have the effect of highly priced oil causing stagnation of the economy.

The risk of undervaluing the Renminbi is inflation. Further damage results from stimulus package in form of more money supply pumped into the economy. It is essential to note that the rate at which Chinese buys is a determining factor in a commodity market. The nature of the Chinese currency makes it the origin of probable world inflation and this has a direct effect on the US economy despite an attempt to regulate prices by the use of Federal Reserve Bank.

A study conducted by McEachern (34) in China shows that ‘‘relationship between Balance of Payment, inflation and the value of currency is strong’’. A body given the authority to regulate value of Chinese currency in relation with other foreign currency notwithstanding its ‘float’ nature is The People’s Bank of China. In the year 2007, there was inflation resulting from rising prices of fuel and meat. The response was to allow the value of Yuan to rise.

Conclusion

This essay presented a clear illustration of inflation in the republic of China. First, it recognizes that China was classified among the fast growing economies in the world with the industrial sector taking the lead. Although the nation records a rising GDP, there are inflation factors which are caused by industrialization and the fast pace of growth.

To realign this statement, the essay stated vividly the role played by human migration in putting pressure on prices of consumer goods. Higher wages earned by city dwellers increases their purchasing power consequently creating demand. On the same note, industrialization leads to higher cost of raw materials. The increase in money supply in the economy by 25 % has cumulatively contributed to inflation in China.

While the stimulus package was intended to jumpstart the economy, their side effect is a decline in values of real estate and equity. More money in circulation eroded access to businesses and consumer’s capital. The paper equally addressed policy issues to deal with inflation. On a final note, Chinese currency policy was tackled expeditiously with reference to its nature in the ‘float’ system.

Bibliography

Fireside, Daniel, et al. Real World Macro: A Macroeconomics Reader from Dollars and Sense. Boston: Dollars & Sense/Economic Affairs Bureau Inc, 2009.

Krugman, Paul. The Return of Depression Economics and the Crisis of 2008. New York: Norton Company Limited, 2009.

McConnell, Campbell, et al. Macroeconomics, Brief Edition. New York: McGraw Hill Company, 2009.

McEachern, William. Econ for Macroeconomics. Stamford: South-Western, Div of Thomson Learning, 2009.

Miller, Roger. Economics Today, the Macro View. Massachusetts: Addison Wesley, 2009.