what are the positive and negative effects of inflation?

Answer 1

Inflation is defined as a persistent increase in the general price level. It can take the form of creeping inflation of several percent per year. This is viewed as healthy for the economy because it means that some level of economic growth is occurring in the economy. On the other hand, hyperinflation can take place in an economy. There is no figure at which inflation can be deemed hyperinflation but a figure of annual inflation as high as 100% could be regarded as such. The economic effects of each of these are different so it will be important to note that I will be looking at creeping inflation. Inflation affects a large number of economic factors within the economy such as unemployment, growth, the balance of payments, distribution of wealth and taxation revenues.

Inflation is viewed as being undesirable because of some serious economic and social effects. Inflation impacts on income distribution making an random redistribution of real income. Those receiving fixed money incomes (e.g., pensioners, beneficiaries etc.) are usually disadvantaged because often their incomes are not adjusted upwards fast enough to compensate for the effects of continually rising prices. Their real incomes (i.e., the goods and services their incomes will buy) will fall. Individuals whose incomes rise more rapidly than the inflation rate will experience increasing real incomes. Generally, the pattern of income distribution tends to become more unequal than it was before inflation. If the rate of inflation is high, individuals with money tend to buy real assets such as property, gold and antiques, which often increase in value faster than the rate of inflation. This group will gain by increasing the size of their share of the nation's wealth.

Inflation tends to increase spending and encourage borrowing at the expense of savings. If prices are rising quicker than incomes, individuals will tend to buy at current prices before goods and services become more expensive and less affordable. Some consumers may buy using higher levels of debt (i.e., borrowing) than otherwise might the case. Savings may be discouraged because with high inflation when the money saved is repaid, it can be worth much less than when it was lent and the real rate of interest may be low. The real rate of interest rates fail to keep pace with inflation the saver loses purchasing power, i.e., their ability to buy things falls. Rising prices are a boon to borrowers because the repayment of interest and the sum borrowed (i.e., the principal) is with lower valued money. Inflation reduces the real value of the amount they owe, as the sum repaid has less purchasing power. Of course, any gain by borrowers must be weighed against the interest they must pay.

Investment, in economics, means the creation of new capital goods. Investment can only take place if there is saving. Inflation encourages spending and discourages saving, so funds that might otherwise have been available for investment tend to dry up. With lower levels of investment there is likely to be a slowing of the rate of growth of national output (GDP). This in turn leads to a reduction in new jobs and so can increase the level of unemployment. Inflation can distort market price signals and the market may fail to allocate resources efficiently. Planning and investment decisions become more difficult to predict as firms are unsure what will happen to prices and costs during times of inflation. If firms are unable to pass on the increase in costs to consumers this will impact on profits possibly causing some firms to close or cut back production and subsequent employment.

Answer 2

For a country inflation meand less production and high demands. which force the country to import more and thus the negative effect is the country's currency will fall internationaly. But, a long term possitive effect is the country will get a lot of foriegn investments. A best finance minister will show more inflation rate than the actual.

Answer 3

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what are the positive and negative effects of inflation?

Answer 4

The effect depend on the prevailing situation. A moderate, gradual price rise is gud. Like 3% per year. Because when the producers of goods want to raise their standard of living, they will deamnd highr price for products, causing inflation. This shows that they're improving economically. But sometimes, prices are raised in illegal ways, so that only owners get profit, not workers. Their salary doesn't increase. That's a problem.