A Review On Inflation
Definition of inflation
Think of the inflation of the largest conventional economic common however, despite the widespread use of this term, there is no agreement among economists on its definition due to the split opinion on defining the concept of inflation where uses this term to describe a number of different situations can choose from the following cases:
*Excessive rise in the general price level.
* High cash income or an element of cash income such as wages or profits.
* High costs
*Excessive creation of cash balances.
It is not necessary that these various phenomena move in one direction at once. That is, it is possible that a rise in prices can occur without being accompanied by a rise in cash income. It is also possible that costs can rise without a rise in profits. Over-creation of cash is likely to occur without a rise in prices or cash incomes.
In other words, the various phenomena each of which can be called inflation are somewhat independent of each other and it is this Independence that confuses the definition of the concept of inflation.
The term inflation is distinguished by the phenomenon it is called and thus consists of a set of conventions and includes:
* Price inflation: i.e. excessive price rise.
Income inflation: any rise in cash incomes such as wage inflation and profit inflation.
Cost inflation: i.e. rising costs.
Monetary inflation: i.e. excessive creation of cash balances.
Thus, some experts believe that when the term inflation is used without distinction as the case in which it is called, the term is meant to be a continuous rise in the general level of prices, since excessive price rises are the meaning that comes to mind directly when the term inflation is mentioned.
Types and forms of inflation
There are many types of inflation, can be mentioned as follows
*Inflation inherent: this type of inflation while not offset the increase in aggregate demand increase in production rates, which reflected the impact of higher prices.
* Creeping inflation: this type of inflation is characterized by a slow rise in prices.
* Pent-up inflation: a situation in which prices are prevented from rising through policies of controls and restrictions that prevent aggregate Agreement and price rises.
Hyperinflation: a condition of high rates of inflation accompanied by rapid circulation of cash in the market, this type of inflation may lead to the collapse of the national currency, as occurred both in Germany during 1921 and 1923 and in Hungary in 1945 after the Second World War.
Causes of inflation
Inflation is caused by various economic factors.:
* Cost inflation: this type of inflation arises because of the high operational costs in industrial or non-industrial companies, such as the contribution of corporate departments to raise the salaries and wages of their employees, especially those who work in production sites, which comes due to the demand of employees to raise wages.
* Demand inflation: this type of inflation arises from an increase in the volume of monetary demand, which is accompanied by a steady supply of goods and services, as the rise in aggregate demand is not offset by an increase in production. Which leads to higher prices.
* Inflation is caused by Total changes in the composition of aggregate demand in the economy even if this demand is excessive or there is no economic concentration as prices are amenable to rise and are not amenable to decrease despite low demand.
Imbalance of the relationship between the amount of money in circulation between individuals and the amount of goods and services.
* Inflation resulting from increased monetary incomes in society.
Inflation arising from the practice of economic blockade against other countries, exercised by external forces, as is the case with Iraq and Cuba.therefore, there is no import and export in the case of total blockade, which leads to high inflation rates and, consequently, the depreciation of the national currency and unreasonable price rises.
Effects of inflation
Inflation has influential economic effects in the course of economic and social development.:
* High prices and the mass of cash in circulation: high inflation results in a rise in the price of consumables.the first groups affected by this rise are those with limited incomes, as well as a large mass of cash circulating on the market. this mass may be confined to the hands of a small group, which constitutes only a very small proportion of the population, reflecting its negative economic effects on the living standards of the population.
Higher inflation rates reduce the purchasing value of cash leading to increased demand for capital to finance proposed projects and increased demand for capital leading to higher interest rates.
* The economic age of enterprises (investment) and their values are affected by inflation rates. As well as the currency exchange rate where to:
Reduction of exports to international markets: increased inflation leads to a decrease in the competitiveness of national products in international markets and this causes increased payments against lower revenues, thus creating a trade balance deficit.
* Inflation leads to higher interest rates and accordingly business profits increase, and these profits decrease with lower interest rates, where assets are financed by the issuance of debt securities. These characteristics do not apply in a number of industrial projects in low-inflation economies. This happens in economies with high inflation rates, as higher inflation causes higher incomes and command rates. Rates which are not real if they have been processed and return to fixed prices.
* Measures to reduce inflation: inflation can be reduced, especially in developed countries, by implementing fiscal and monetary policy measures.
Inflation treatment policies
The central banks (central banks) of different countries develop and implement monetary policies by adopting a set of quantitative and qualitative instruments:
First: quantitative tools
Increase the ****** rate: one of the usual activities carried out by commercial banks is to discount commercial papers to individuals and in other cases they ****** them with the central bank, in which case the central bank raises the ****** rate in order to affect the credit capacity of banks in order to reduce the amount of liquidity circulating in the market.
Banks (central banks) enter the markets selling securities in order to withdraw part of the liquidity traded in the market. Or the so-called Open Market Entry.
Increased legal reserve ratio: commercial banks hold a portion of deposits with central banks and the higher this ratio, the lower the credit capacity of banks. If deposits were for example (300) billion dinars, a reserve ratio of (25%) would mean holding (75) billion and if the central bank raised this ratio to (50%) would mean reducing the credit capacity of banks by (75) billion dinars, i.e. the legal reserve would be (150) billion instead of (75) billion and certainly this would affect the liquidity in circulation and thus reduce the inflation rate.
Second: qualitative tools
The qualitative tools are the way of persuading the directors of commercial banks and their bank credit officers of the state policy aimed at reducing liquidity in the markets, which is more effective in the developing country than in other countries.
Third: interest rates
Interest rates are often associated with borrowed sources of Finance, whether they are short, medium or long-term.capital is allocated in the framework of financial theory through interest rates. these rates vary according to different borrowing periods. interest rates on short-term loans are lower while interest rates on long-term loans are high, while interest rates on medium-term loans are between the two rates and interest rates increase when the demand for capital from the economic boom increases, and investment opportunities may be available that encourage investors to take advantage of these investment opportunities.
Investors & apos; expectations have a clear effect on increasing demand for capital.their expectations are that the economic situation is improving and that economic growth will lead to investment opportunities available to investors. therefore, the demand for capital and short-term loans increases, resulting in short-term interest rates rising above those on long-term loans. contrary to the rule that interest rates on long-term loans are higher than those on short-term loans, interest rates are affected by several factors. the effects of these factors are that the lender (creditor) requires bonuses to be added to real interest rates.
The most prominent of these factors:
1. inflation rate: inflation rates affect the industrial production costs of businesses in general and therefore the demand for capital to cover these costs increases. As noted earlier, the decrease in the purchasing power of cash caused an increased need for financing. Assuming that an Enterprise estimates that the cost of a production line proposed in its annual plan for the coming year amounted to (10) million dinars, and when the production line was to be implemented, it was found that this amount was not sufficient to cover the costs of establishing such a production line, but required (15) million dinars. this increase is the result of increased inflation and the devaluation of the national currency, which has led to an increase in the demand for capital and this increase in demand, leading to an increase in interest rates on borrowed finance, if the financial decisions of the business establishment are affected not only by interest rates but also by inflation in the exchange rates of the national currency against other currencies, interest rates are consistent with Inflation rates.
In Germany, interest rates were lower than their counterparts in the United States the reason that the inflation rate in Germany was lower than in the last session. Inflation rates in South American countries were between 10% and 20%, which led to higher interest rates in the southern continent compared to other countries where inflation rates were lower. Because of inflation, lenders (creditors) demand a premium called the inflation premium added to the real interest rate, if the real interest is risk-free as well as the inflation premium. Some lenders may ask for liquidity bonuses and liquidity means the ability of any asset to convert into cash quickly and without loss, thus a measure of the liquidity of investment instruments such as stocks and bonds.
2. supply and demand: the demand for borrowing funds increases in cases where the national economy of the state is in a state of recovery and Vogue, in order to provide investment opportunities for investors and different levels of return and risk expected for any investment opportunity, chosen, and this increase in demand for funds is accompanied by an increase in interest rates, while the increase in the supply of funds
3. exchange rates: exchange rates are affected by several factors, most notably:
The high exchange rates of foreign currencies which leads to the devaluation of the national currency towards these currencies.
Declining exports or falling prices affect the volume of cash inflows into the country.
Wars and natural disasters affect the national economies of countries as this affects the power imbalance of the national economy, which leads to the devaluation of the national currency against other currencies.
Inflation rate: high inflation in national economies causes the national currency to devalue against other currencies, thereby dispersing the exchange rate resulting in an increase in the number of units of the national currency exchanged for one unit of a corresponding foreign currency