The economic crisis in every country can affect not just one person or enterprise, but the entire population. The results can be detrimental to all areas of life. We propose to understand what inflation is, what are the disadvantages and disadvantages of the crisis and whether it is possible to overcome it.
Inflation - what is it?
Under this economic term means raising the value of goods and any services. The essence of inflation is that at the same time it will be possible to buy fewer times the goods for the same money than before its onset. It is customary to say that the purchasing power of finance has declined, and they have depreciated, that is, left without a part of their own value. In a market economy, such a process can manifest itself in a rise in prices. With administrative intervention, pricing remains the same, but there may be a shortage of product groups.
What happens during inflation?
The economic crisis gradually penetrates into different spheres of society and destroys them. As a result, production, the financial market and the state may suffer. What many people know about inflation are known by hearsay. During inflation:
- the finances are depreciating relative to gold;
- cash in relation to goods begin to depreciate;
- depreciate money relative to foreign currency.
This process has one more meaning - raising prices, but this does not yet indicate an increase in the value of all goods. Sometimes some of them remain the same, while others fall. The main problem is that they can rise unevenly. When some prices rise, and others fall, the third and at all can remain stable.
What does inflation depend on?
Economists argue that the rate of inflation depends on:
- growth of money issue;
- growth rate of money turnover without taking into account the increase in their volume;
- raising the cost of own production by large companies;
- reduction of production, which will entail a reduction in the number of goods.
What influences inflation?
Such a process as high inflation can affect the purchasing power of money, and the personal incomes of an individual person can not directly depend on it. The standard of living decreases when incomes are fixed. This applies to pensioners, students and disabled people. Because of the economic crisis, this category of people is becoming much poorer and therefore forced to seek additional income, or to reduce their expenses.
When incomes are non-fixed, a person has such an opportunity to improve his own situation in this situation. This can be used by company managers. An example may be a situation where prices for products are growing, and the cost of resources remains the same. Thus, the revenue from sales will exceed costs and profits will increase.
Causes of inflation
It is customary to distinguish between such causes of inflation:
- Increase in government spending. The authorities use money emission by increasing the mass of their own needs for commodity circulation.
- Expansion of the cash flow due to mass lending. Finance is taken from the issue of unsecured currency.
- Monopolies of large enterprises to determine the cost, as well as the cost of production.
- The volume of national production is declining, which may trigger an increase in prices.
- Increase of taxes and duties of the state.
Types and types of inflation
Economists distinguish such basic types of inflation:
- Demand - arises in consequence of an excess of demand in comparison with the actual volumes of production.
- Proposals - the price policy is increased due to increased production costs at a time when there are unused resources.
- Balanced - the cost of certain products remain the same.
- Forecasted - taken into account in the behavior of economic entities.
- Unpredictable - there is an unexpected, because the price increase exceeds expectations.
Depending on the speed, it is customary to separate such types of crisis:
- creeping;
- galloping inflation;
- hyperinflation.
At the first, the cost of goods rises by ten percent per year. This moderate inflation does not threaten the collapse of the economy, but requires attention to itself. The next is also called a step-like one. Prices with it can increase from ten to twenty percent or from fifty to two hundred percent. At the last price during the year rise to fifty percent.
Pros and Cons of Inflation
The economic crisis has both disadvantages and advantages. Among the minuses of the process:
- depreciation of cash;
- destruction of all spheres of life;
- the overall standard of living of people is declining.
Everyone who knows what inflation is, assures that it has advantages. Pros of inflation:
- business activity is increasing;
- production and employment are expanding;
- demand for shares is increasing;
- there is a revival in commodity markets.
The relationship between inflation and unemployment
According to economists, inflation and unemployment have a clear relationship. This is described in the model of the famous professor of one of the English schools of economics A. Phillips. He was engaged in researching data in his country from the period 1861-1957. As a result, he concluded that when unemployment exceeded the three-percent level, prices and wages began to decline. After some time in this model, the rate of increase in wages was replaced by the indicator of inflation.
The professor's curve can show the reverse dependence of the crisis and unemployment in a short period and the possibility of choice, compromise. In a short period, raising the cost of goods and services, wages, promotes the stimulation of labor supply and expansion of production. When the crisis is suppressed, it leads to unemployment.
How is inflation calculated?
To determine the level of inflation, it is customary to use the following inflation indicators:
- The price index for consumers - reflects the changes in time of the general level of value for goods that people can buy for their own consumption.
- Producer price index - reflects the change in the price policy in the sphere of industrial production.
- Core inflation - characterizes non-monetary factors and is designed to be calculated on the basis of the CPI.
- The GDP deflator - is able to display changes in the value of all goods that are manufactured in the country throughout the year.
In order to calculate the index of the economic crisis, the price of goods is taken one hundred percent, and all changes in future periods are displayed as a percentage of the cost of the base period. The index should be calculated every month and year-on-year as a change in the value of goods and services in December of this year by the same month of the previous year.
Inflation and its consequences
Financiers argue that such a process as inflation can affect the standard of living of people. There are such consequences of inflation:
- the purchasing power of finance decreases;
- there is a significant difference between the incomes of different classes of the population of the country;
- the rate of national currency falls;
- citizens' trust in the government is declining.
Raising the value of certain goods is often a natural process, because it arises from the growth of wages. Hence the conclusion - this crisis situation is impossible to avoid, but you can prepare. There is an excellent and relevant statement in this difficult economic situation if warned, then armed.
Methods of combating inflation
The government of the country, which is in crisis, should pursue a purposeful policy to eliminate the difficult situation. Methods for regulating inflation are direct and indirect:
- cash flow control through central bank management;
- process of regulating the accounting and loan processes of commercial banks by a central financial institution;
- reserves of commercial financial institutions, operations of the central financial institution on the securities market;
- the process of direct and indirect government management of loans and cash flow;
- the impact of the state on the value of goods;
- the state regulates the wages;
- the state is engaged in the process of regulating foreign trade, export and import.