UNIT 12. INFLATION

DISCUSSION 1. Why are there periods when a country's economy works more

strongly than others? 2. What do you know about inflation?

READING INFLATION

Inflation is generally defined as a persistent rise in the general price level with no corresponding rise in output, which leads to a corresponding fall in the purchasing power of money. It leads to a redistribution of income and wealth, often hurting sections of society with little economic power (e.g. pensioners); affects balance of payments because exports become relatively expensive and therefore less competitive as imports become relatively cheaper. Other consequences of inflation are uncer­tainty about the value of money or the real meaning of prices and resource costs of frequently changing prices.

Inflation occurs in many countries but at different rates; it varies consi­derably in its extent and severity. There are different rates of inflation: from gentle creeping (mild) inflation (perhaps 5% per annum), which may pose few difficulties to business, to galloping or hyper-inflation (say, 100% +), which entails enormously high rates of inflation and create almost insurmountable problems for the government, business, consumers and workers.

Demand-pull inflation occurs when demand for the nation's goods and services outstrips that nation's ability to supply these goods and services. This causes prices to rise generally as a means of limiting demand to the available supply.

An alternative way that we can look at this type of inflation is to say that it occurs when injections exceed withdrawals and the economy is already stretched (i. e. little available labour or factory space) and there is little scope to increase further its level of activity.

Cost-push inflation. Alternatively, inflation can be of the cost-push variety. This takes place when firms face increasing costs. This could be

66 PART I. ECONOMICS

caused by an increase in wages owing to trade union militancy, the rising costs of imported raw materials and components or companies pushing up prices in order to improve their profit margins.

A further problem is that once the rate of inflation has begun to increase, a serious danger of expectational inflation will occur. This means that there will arise a generally held view of what inflation is likely to be, regardless of whether the factors that have caused inflation are still there or not. To protect future income, wages and prices will be raised now by the expected amount of future inflation.

The monetarists argue that inflation is caused by increase in the supply of money.

We can establish how much inflation there is in our economy by measur­ing it. The most common way of doing this is by using the Retail Prices Index (RPI). A collection of goods and services is decided upon. These are then priced in the base year and each month they are priced again. If, on average, they have increased by 12% after twelve months then there is an annual rate of inflation of 12%. There are also other indicators of inflation in the eco­nomy. Wholesale prices can be measured, house prices, prices of industrial output at the factory gate, import prices and the level of retail sales.

• OCABULARY persistent rise - постійне піднесення

VOTES with no corresponding rise in output - без

відповідного піднесення виробництва

consequences - наслідки

severity - гострота

creeping or mild inflation - повзуча, або

м'яка інфляція

may pose few difficulties - особливих

проблем не становить

galloping or hyper-inflation - галопуюча,

або гіпер-інфляція

entails enormously high rates of inflation -

означає (веде до) величезного

зростання інфляції

insurmountable - колосальні, численні

demand-pull inflation - інфляція попиту cost-push inflation - інфляція витрат expectational or anticipated inflation -

очікувана інфляція

to outstrip - переганяти, випереджувати

owing to trade union militancy - завдяки

войовничості профспілок

in order to improve their profit margins -

для збільшення розмірів прибутку

to stretch - натягувати, напружувати

regardless - не зважаючи

argue - тут доводити, стверджувати

Retail Prices Index (RPI) - індекс

роздрібних цін

EXERCISES I. Answer the following questions.

1. Give the definition of inflation. What can you add to it?

2. What can you say about the extent and severity of inflation?

3. Types of inflation (short characteristics). Are there any others?

4. What is demand-pull inflation? Name countries with this type of inflation.

5. What is cost-push inflation? Name countries with this type of inflation.

6. How do the monetarists explain the reasons of inflation?

7. How is inflation measured?

II. Suggest the Ukrainian equivalents.

• inflation varies considerably in its extent and severity

• mild inflation of a few %

• rate of inflation

• insurmountable problems

• demand-pull (cost-push) inflation

• the economy is already stretched

NIT 12. INFLATION

III. Inflation. Match the terms and definitions.

Terms	Definitions
1. inflation	a) Demand for goods and services exceeds the supply, causing buyers to bid up the prices for such goods and services.
2. cost-push inflation	b) Inflation, i. e. rising prices, which seem to be primarily related to increases in the costs of business inputs.
3. demand-pull inflation	c) Inflation at extremely high rates (say, 1000,1 million, or even 1 billion per cent a year).
4. galloping or hyper­inflation	d) The steady decline in value of the currency unit evidenced by generally increasing prices.
5. creeping inflation	e) Inflation with a fairly stable rate from year to year, averaging less than 5%.

IV Replace the parts In italics by synonyms, a persistent rise hence

may pose few difficulties which entails enormously high rates at length

inflation occurs when firms face increasing costs owing to trade union militancy

V Test yourself. "Economic Indicators." Mark the following sentences as True or False. If

they are false, explain why.

1. Inflation is a measure of increasing prices.

2. High inflation generally means increasing unemployment.

3. A healthy consumer economy always means lower unemployment.

4. Higher investment in training and education is easier during a low point in the economic cycle.

5. A tight fiscal policy means high taxation and high government spending.

6. Governments need to control their borrowing requirement.

7. A high value of the local currency is good for exports.

8. House-building is seen as a good indicator of what is happening in the domestic economy.

9. Gross National Product (GNP) is a measure of the annual value of sales of goods and services in a country, and it does not include sales for companies abroad.

10. Capacity utilization is a measure of how many people are in work.

11. Generally, high levels of supply and low levels of demand means unemployment falls.

12. Growth creates wealth and wealth creates jobs.

13. Rationalization means cutting labour costs so people lose their jobs.

14. Increased investment in real terms means increased investment above inflation rates.

15. A balance of payments deficit means a company is spending more than it earns.

True	False
□	D
D	□
□	□
D	□

□

П □ □

□

D

П	п
D	D
□	D
D	П
П	D

D

f.8

PART I. ECONOMICS

VI. Financial Indicators. In order to get an overview of the health of an economy in a country, bankers may examine the financial indicators, which show the main economic figures. Look at the items in the box and match them with the definitions.

Gross Domestic Product	Gross foreign debt	trade balance
annual inflation	bank prime rate	FX reserves
average monthly salary	industrial output	discount rate
current account balance	unemployment figures	Annual Percentage Rate

1. The amount of foreign currency held by the country.

2. The yearly interest rate.

3. Those people in a country who do not hold a job.

4. The rate between imports and exports.

5. The monthly payment paid to employees.

6. The yearly inflation figures.

7. The amount of goods produced by manufacturing companies.

8. The bank lending rate.

9. The amount of money owed by the country.

10. The sum held on the country's current account.

11. The interest rate at which central banks lend to commercial banks.

12. The total value of goods produced by a country in a specified period.

VII. Central Banks and Economic Stability. Choose the correct phrase from the alternatives in
italics to create eight true sentences about economic management.

1. Most people think politicians/bankers are better than politicians/bankers at running an economy.

2. Independent central banks have a good record on controlling inflation/public opinion.

3. Freedom to control monetary policy/banking regulations means being able to change exchange rates/political opinion.

4. Low interest rates/high interest rates help to control inflation/small banks.

5. High interest rates often cause small banks/central banks to fail.

6. In developing countries, central banks cannot help small banks because of the risk of low inflation/hyper-inflation.

7. Newly independent central banks are limited by their agreements with the International Monetary Fund/the United Nations.

8. Any risk of inflation can mean disinvestment/new investment from investment fund holders/national governments.

VIII. Writing Practice. Make a short summary about types of inflation from the above text. Use
the opening phrases from Appendix I.

UNIT 12. INFLATION

UNIT 13.