1) Why do govts consider it a priority to control inflation?
Inflation can cause recession in an economy which would cause high unemployment and instability in the nation, plus personal effects like depression. For a govt to have a healthy nation, there has to be a decent economy.
2) 2 main causes of inflation - explain.
Demand Pull inflation which is when there is excessive aggregate demand. This is caused by there is a rise in consumption, investment, goverment spending or international trade earnings. People or businesses spend more money at a fast rate which fuels inflation.
Cost Push inflation - when the cost of production is increased, so must the price.
3) 2 reasons why inflation is bad for business.
A business is affected in cost by inflation. Wages may need to be increased to cope with the higher cost of living thus the business has to satisfy its employees. Also, raw materials and advertising may also cause a higher cost to the business. International business will suffer a fall in export earnings.
4) IF there is Demand Pull inflation, unemployment will be high thus making some people redundant or unable to start working. Also if more national output is being produced, there will also tend to be unemployment. Thus employees are negatively affected by inflation.
Consumers are also nagatively affected since they have less money to spend and the cost of living is higher.
5) Demand-side policies - the government aims at tackling aggregate demand wither by reducing taxes or increasing their spending, this is dealing with expansionary fiscal policy. Expansionary monetary policy is used to boost aggregate demand by reducing interest rate to make it more of an option for people and businesses to borrow money. Protectionist measures concern local business and their competition with international businesses by placing a tariff in order to give local producers a price advantage.
Supply-side policies - aim at increasing aggregate supply in the economy. This is achieved by lowering corporation tax or reducing interest rates. The government may also spend more on education and training in order to ensure a future of skilled workers.
6) Q 1.5.3
a) African countries are likely to utilise international trade, any rise in international trade earnings may cause inflation. The government may have increased its spending to try to deal with the problem which is counter productive since this also can lead to inflation. Costs of production being increased due to inflation worsens the situation.
b) Already 80 percent of the population are below the poverty line, if the inflation continues this percentage can only increase. Such a depressive situation is not good for the inhabitants and the Zimbabwean government may be having to deal with high levels of resentment from its nation. If the number of people below the poverty line grows, less people will have money to spend and the economy will fail altogether.
Peak/Boom - economic activity is at its highest. Unemployment will be low and expenditure , investment and export earnings will be high. Employees are likely to be receiving bonuses as the business is making a good profit.
Recession - When there has been a dip in the level of economic activity for half a year. There will be a decrease in aggregate demand at this time. People will be more cautious with their money so investments will decrease. Unemployment will be rising at this time as businesses try to cut costs.
Slump/Trough - This is when unemployment is high and expenditure is at its lowest. Businesses will have a poor cash flow and some may even close down.
Recovery/Expansion - national income will increase, thus consumption, investment, exports and employment will rise gradually.
A business can cope with recession by -
Cost reduction methods - being more conscious about the amount of their bills, finding a better deal from suppliers or moving to cheaper premises as well as some staff redundancies in extreme cases,
Price reductions - as people are being more cautious with their money, they're likely to go with the cheapest option of a good or service.
Outsourcing - costs of production may be lowered by utilising overseas opportunites thus enabling the company to lower its prices and have an advantage over its competition.
Non-pricing strategies - special offers and good after sales care will make the consumers think they are getting more for their money.
Growth via improved quality of factors of production -
Capital goods - the more investment the better. Spending money on an economy's infrastructure will keep it healthy and attract business investments in the future.
Education and Training - The more educated and trained people are, the more capable they are at their jobs making them a bigger asset to the economy.
Health Technology - A healthy staff are less likely to take time off or retire early, also they are more capable to do their jobs if they are healthy.
Changes in labour force :
Changes in demography - Fall in birth rate means there are less workers and an ageing populatoin. A baby boom will lead to a large workforce. Education commitments might mean people start work later or need flexible hours or part time work.
Changes in participation rates - this measures the number of people who are self employed or employed as a percentage of the total labour force. This can be caused by government incentives such as lower rates of income tax.
Changes in net migration - this is the difference between immigration and emigration.
Barriers of growth for LEDCs are that their may not be enough education for an efficient workforce and with this inefficiency there may not be enough revenue to put back into remedying the infrastructure of the economy, especially as a large percentage of money is used to pay back debts. The large population is also a barrier as it is a drain on resources since the majority lack sufficient education and training.
