what is imported inflation and it's effects on an economy and how do we combat it?

Answer 1

We now work in a very global economy and many firms import a significant proportion of their raw materials or semi-finished products. If the cost of these increases for reasons out of our control, then once again firms will be forced to increase prices to pay the higher raw material costs. This could happen for several reasons:

Exchange rate changes - if there is a depreciation in the exchange rate, then our exports will become cheaper abroad, but our imports will appear to be more expensive. Firms will be paying more for their overseas raw materials.
Commodity price changes - if there are price increases on world commodity markets, firms will be faced with higher costs if they use these as raw materials. Important markets would include the oil market and metals markets.
External shocks - this could be either for natural reasons or because a particular group or country has gained more economic power. An example of the first was the Kobe earthquake in Japan, which disrupted world production of semi-conductors for a while. An example of the second was when OPEC forced up the price of oil four-fold in the early 1970s.
Exhaustion of natural resources
As resources run out, their price will inevitably gradually rise. This will increase firms' costs and may push up prices until they find an alternative source of raw materials (if they can). This has happened with fish stocks. Over-fishing has put many types of fish and fish-based products under extreme pressure, forcing their price up. In many countries equivalent problems have been caused by erosion of land when forests have been cleared. The land quickly becomes useless for agriculture.

Imported inflations effects on an economy are generally to reduce consumers purchasing power and to cause an increase in unemployment. It can also cause a nations currency to decrease in value relative to other world currencies which is detrimental to paying off foreign debt but can increase exports.

The only way to fight imported inflation is to reduce or eliminate the need to import commodities which can be difficult in areas that the nation is short of (ie. Fiji needing concrete as it has no natural resources to produce it's own).

Answer 2

Buy local.