Inflation and Economic Growth: The Effects of Inflation on Economic Growth Aboki Gazali Usman Master of Business Administration, Faculty of Business and Accounting Infrastructure University Kuala Lumpur IUKL 1.0 Abstract: In the form of economic, Inflation is refers to rate or percentage which indicate the level increase in price of goods. This means inflation is commonly refers in the rising in price levels of product and services or could be in the money supply rising, basically, inflation occurs more in prices than other standards, thus If the money supply has been money supply been raised up this shall clearly explain price level. Today many countries in this world are suffering because of slowed economy growth that lead to unstable
INFLATION Submitted to Prof. Zeshan Ahmer Partyyyyyyyycipants Tables for life preface Introduction What is Inflation? Inflation is the rate at which the cost of goods and services rises over time. When inflation rises, the value of the money goes down because consumers aren't able to buy as much as they previously could with that same money. (Brooks) Increase in the price level of goods and services in a specific economy over a period of time is Inflation. The monetary value or real value of a currency falls because of the increase in prices.
• Adverse Effect on per capital Income: Rapid growth of population directly effects per capita income in an economy. As long as the rate of population growth is lower than the per capita income, rate of economic growth will rise but if population growth exceeds the rate of economic growth, usually found in the case of less developed countries , per capita income must fall. • Unemployment: A fast growth in population means a large number of persons coming to the labour market for whom it may not be possible to provide employment. In underdeveloped countries the number of job seekers is expanding so fast that despite all efforts towards planned development, it is not been possible to provide employment to all. Unemployment , underemployment and disguised employment are common features in these
aggregate output/income. And another reason-being that, Central bank will attend to bring down inflation by rising interest rate, which will lead to a decline in consumer spending and investment spending. As a result, we will have a recession. On the other hand, Inflation can be damaging to the economic growth since it induces economic agents to divert away their funds from productive activity and productive investment in an attempt to avoid the inflation effects on income (small 1998:37). During inflationary period people get confused and become uncertain about what spend to their money on or where to invest it.
The fall is the result of a new international division of labor (including outsourcing), which is detrimental to manufacturing employment in industrial countries, especially as concerns its non-skilled labor. In the United Kingdom during (1979-1981), the growth rate falls down 3.7%-2.5%, in Germany 4.2% to 0.6%, in France 3.2%-0.8%, in Italy 6.0%-0.3%. This fall has the major effect on unemployment in the UK it rose from 5% - 12%, in Germany from 3.2%-8.0%, in France 5.9%-10.2%. These factors have a large effects to consumption, high interest, low levels of investments, and sharp revolution of pound that make reduction and this caused manufacturing to fall
Moreover, it causes inflation and imbalanced economic development in market structures which cause economic delay in growth. This leads to delays in investments and starting of industries. Large scale corruption can hurt the economy and impoverishes the population. Moreover, it reduced tax revenues and government’s ability to finance budget expenditures, which is deficit
Inflation is one of the major problems in macroeconomics. Generally in theory, inflation is an increase in the overall price level and it is calculated based on the Consumer Price Index (CPI). Inflation and economic growth are incompatible. Government around the world will take action to minimize the negative impact of inflation to a certain extent when inflation is expected to be happened. Low inflation rate and upward economic growth is impossible in reality (“Inflation and Economic Growth”, 2010).
Cost-push inflation is an alleged type of inflation caused by substantial increases in the cost of important goods or services such as inputs like labour, raw material, etc. The increased price of the factors of production may cause a decline of supply of these goods. While the demand remains constant, the prices of commodities increase lead a rise in the overall price level. Not only that, Cost-Push Inflation can be also caused by: • Increasing of the price of the commodities. For example.
The cost of borrowing gets impacted by the change in interest rates as mentioned before. When the rates increase, the banks charge a higher rate for the loans they give out. Starting a business or expanding the business at times of high interest rates hamper growth and result in lower revenues and delayed profits. Interest rates for personal loans also go up at the same time therefore the purchasing capacity of the consumer also reduces. They have to pay higher interests, which results in lower disposable income, which in turn results in lesser purchasing capacity.