Economic inflation is one of the causes of poverty and hardship for people. For example, in Venezuela, the inflation rate reached a record of up to 1,000,000%. It can be said that this is a difficult and difficult problem to solve for many countries today. So What is inflation? How to calculate, measure and limit its consequences. Find out in the article below.
Inflation and some related concepts
Inflation is quite common in the country's economy
What is inflation? This is a common question asked by many people when they are first exposed to this concept. Simply put, this is a continuous and rapid increase in the general price level in a certain period of time for goods and services, leading to a loss of value for money. Specifically in life, if the general price level rises, along with a previous amount of money, you will only be able to buy a much smaller amount of goods and services than before inflation occurred. At the same time, it also reflects a decline in the purchasing power of the currency.
Inflation can occur in any country that uses cash as a payment intermediary, it is considered a natural economic phenomenon that the country also experiences. The unit of calculation is percent (%).
Inflation can be classified into three different levels including:
– Natural: 0 to less than 10%.
– Galloping: 10 to less than 1000%.
– Hyperinflation: over 1000%.
However, to better understand the nature of inflation, you need to learn some other related economic terms as follows:
Deflation: a decrease in the overall price level of the economy.
– Deflation: reduce the actual rate of inflation.
– Hyperinflation: the level is difficult to control and takes a long time to overcome.
– Inflation: this is a term used to refer to economic problems, including slow economic growth, high unemployment.
– Reinflation: raising the general price level to combat economic pressures caused by inflation.
Find out what causes inflation
High production costs are the cause of inflation
There are many reasons pointed out that contribute to the increase in inflation in countries today. However, it can be pointed out that the two main factors that have the strongest impact are push costs and demand pull. When inflation occurs, governments need to balance revenue and expenditure until the economy is balanced again. Specifically, the causes will be analyzed right below:
– Due to the drawbridge
On the market, there are diverse products, and at the same time they have a close relationship with each other in terms of price. Therefore, when any item increases in price, it can also lead to a dizzying increase in other items. Making the common ground for the prices of all kinds of goods to escalate, making it difficult for buyers.
At this time, the main cause of inflation is the rapid increase in demand, that is, the market's consumer demand increases. For example, the price of gasoline is one of the prices that greatly affects the overall price of the market. Therefore, if gasoline prices increase, other prices will increase: prices of fruits, agricultural products, etc.
– Due to cost push
The full cost of the business includes factors such as: the price of input materials, machinery, insurance premiums, wages for workers, taxes, etc. If the cost of one of the above types of expenses increases high will lead to an increase in the total cost of production. At this time, enterprises are forced to increase the general price level to ensure profits for the whole enterprise. Leading to a general increase in prices of an industry or sectors in the country's economy.
– Due to structure
The economy is the sum total of different groups of businesses. If there is an effective product or business in the market, businesses will consider increasing wages for employees. But there are also cases where the increase is only nominal, but in reality, workers do not enjoy it.
Following the same trend, other commodity businesses were also forced to increase wages for workers, even though the business situation was not stable. This leads to an increase in production costs and an increase in the product price level. Create an ever-increasing inflation situation.
– Affected by import and export processes
If exports increase, aggregate demand will increase more than total supply, products will be collected mainly for export, causing a decrease in domestic supply. The balance of supply and demand at this time will have an imbalance and cause inflation.
In case the price of imported goods increases due to an increase in taxes or the general price in the world increases, then when sold in the country, the price must also increase. Creating a situation where the general price level is inflated many times, creating economic inflation.
Inflation can also have a positive effect on the economy, but it only applies to economies with a stable growth rate of 2-5%. Allowing the government to choose more measures to stimulate investment, economic development in the long term in the future. At the same time reduce the unemployment rate in the society.
Measurement methods and corrective measures
Measuring inflation through indicators
For the most accurate measure of inflation, it is common to track the price changes of a large variety of goods and services in an economy. Usually it will be provided by reputable state organizations.
Commodity prices will become a closely linked combination to help agencies and organizations calculate the average price of a set of products. Currently, there is no exact measurement that can estimate the inflation rate of an economy, which depends so much on the share of each commodity that is assigned. At the same time, it should also be based on the scope of the economic area being surveyed.
However, the most popular measure of inflation used by many people today is CPI (short for consumer price index). This index will give you the general price of a large number of goods and services purchased by ordinary consumers.
Currently, to limit inflation and protect the economy, many countries have applied a number of specific solutions such as:
– Reduce the amount of money in economic circulation by: stop issuing money; increase the reserve requirement ratio; increase the rediscount interest rate and deposit interest rate; open sale of valuable documents; reduce budget spending;….
- Apply measures to increase the fund of consumer goods to balance money in circulation, specifically: reduce taxes, encourage free trade in the economy.
- Carrying out the application of monetary reform policies
- Borrowing aid from abroad.
Here is a collection of information to help you answer your questions What is inflation? Hopefully the knowledge provided above will help you calculate the general consumption index of users in the economy. From there, make sound business decisions.
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