Rapid Inflation

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  • Rapid Inflation
    • Example: Venezuela
      • The overall inflation rate has surpassed 53,000,000%
      • In 2004 oil prices increased, and due to Venezuela’s large oil reserves, the economy boomed, and hyperinflation occurred.
      • The cost of necessities like food and medicine has risen dramatically.
      • Notes are no longer functional
        • It cannot be printed fast enough to keep up with the inflation rate.
        • The government cannot afford the paper for the notes.
      • Instead of using money, Venezuelans trade goods.
      • Venezuelans shop at stalls instead of supermarkets to avoid the extra costs of tax.
      • GDP has fallen by 14% in 2017
    • Government spending
      • Pressure on a government to increase the value of welfare payments as the cost of living climbs higher.
        • E.g. state pension, unemployment benefits
    • Expectations and demands
      • An increase in pay claims as people look to protect their real incomes.
        • This can lead to a rise in unit labour costs and lower profits for businesses.
        • However no all workers belong to strong trade unions who can use collective bargaining power to bid for higher pay.
    • Increased cost of borrowing
      • Financial markets seek to protect themselves against rising prices.
        • So increase the cost of borrowing on short and longer-term debt.
    • Negative real interest rates
      • If interest rates on savings accounts in banks are lower than the rate of inflation, then people who rely on interest from their savings will be poorer.
      • Hyperinflation destroys the value of savings, as money will have a lower value in the future.
    • Business competition in both domestic and international markets
      • When a country has a higher rate of inflation than others, exports of goods and services become less price competitive in global markets.
        • this may show through in reduced export orders, lower operating profits and fewer jobs, and also in a worsening of a country’s trade balance.
        • A fall in exports can trigger negative multiplier and accelerator effects on real national income and employment.
    • Business uncertainty and planned investment
      • Low confidence because firms cannot be sure of what their costs and prices are likely to be.
      • Uncertainty might lead to a lower level of capital investment spending which might then damage a country’s productivity growth and long run productive potential.
    • Social costs
      • Puts severe pressure on democratic institutions and can lead to growing political protest and social unrest.
      • Falling real living standards can prompt a brain drain of some a country’s most able people, leaving the country with a diminished labour force.
      • Poverty and poor living standards due to low purchasing power.
    • Functions of money
      • Destroys the internal purchasing power of money
        • Alternative currencies take the place of the domestic unit of exchange e.g. trade
        • Shadow markets with products traded at unofficial prices become the norm.
    • Income redistribution
      • If prices are rising faster than wages, then there will be a steep decline in real incomes/ purchasing power.

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