Inflation for Transportation Fuel and Apparel - myassignmenthelp

Question: Discuss about theInflation for Transportation Fuel and Apparel. Answer: (Blinder J, 1988) defined the term inflation as that general rise in the prices of goods and service. He claimed that inflation cannot in this matter be defined or announced due to the rise of one or two goods and the general increase of many goods or services. Some of these goods according to (Blinder J, 1988) are food, housing, transportation, fuel, and apparel. He stated further that these many goods and services but me increasing the impact to be felt in the economy and that explains why one or two goods can not necessarily lead to inflation. Causes of inflation According to (muley, 2009) inflation is majorly caused by the excessive demand for goods or services or the general decline in the supply aggregate or rather the output. This now explains why the scholars like (Dr Econ, 2013) stated that there are two types of inflation: cost-push inflation and demand-pull inflation. Both of these types result in an overall increase in the price level of goods in the economy but the causes of the two types of inflation may differ. Demand-pull inflation is as a result of the increasing demand for goods or services in a given economy when that economys productive capacity is not reciprocating the same increase. This means that there is less availability of goods and services in the market than the money supply. It's generally termed as too much money spent chasing few goods. The major causes of demand-pull inflation include Interest rate cut Rising wages and monetary growth lead to too much money in the economy and this makes the prices for goods and services to increase. Increased government expenditure that increases the money supply in the economy as well as driving up aggregate demand Expectations for a future increase in prices leads to inflation in that people tend to save for such periods and also the firms and workers increase their prices as a way for catching up with the expected inflation(Agarwal, 2017) On the other hand, cost-push inflation is caused by the increase in the inputs in the course of production or simply raw materials. This leads to increase in prices for this goods and services thus reducing the supply of the goods and services. (Amadeo, 2017) states that the causes of this type of inflation include: When there is monopoly achievement by a company. The company tends to reduce its supply of good to achieve their profits objectives. Wage inflation where workers and laborers force for increased pay and as a way of getting the profit back, the companies pass the costs of labor to consumers by increasing the prices of Government regulation and tax. Unfavorable and high taxes imposed by government leaders to increase in the goods produced within that economy. Exchange rates Natural disasters that lead to inflation by hindering supply of goods and services. Theories of inflation Cost-push inflation theory Its a theory that was developed during and after the second world war. According to cost-push inflation theory, the prices of goods and services rise due to rising cost of production. Majorly these cost of production is the cost of raw materials and labor costs or wages. During the production of goods and services, when the cost of producing these goods goes high, the companies pass this burden to consumers of these goods and this leads to increased prices. For instance, according to this theory, take a situation whereby the steel goes high, the cost of the tractor will consequently rise, this will automatically lead to costs of agricultural products being produced with the help of that tractor.(Thorp Quandt, 1959) It is caused by the monopoly elements either in the labor market when there is wage-push or in the commodities market when there is profit-push but mostly it is due to wage-push which increases the cost of production and hence prices. Objections of cost-push inflation One of the objections to cost-push inflation theory is that its only a theory that can only be used to explain why inflation occurs in some product markets and not all. This theory is only limited to oligopolistic and monopolist market types whereby firms in these markets dictate the prices of goods. They tend to raise the prices when there is a need for more prices or when compensating costs of production incurred (labor and raw materials) due to the imperfect competition they are able to administer prices anyhow and thus inflation. But this is only in the above two markets; the other markets like perfect competition and monopsony have a rear chance of rising prices so as to increase the profit margins since the price is dictated by all participants in that market. Therefore, the cost-push theory has weakness in explaining as to why inflation occurs since it does not cover all markets. References Agarwal, P., 2017. demand pull inflation. macroeconomics -intelligent economics, p. 1. Amadeo, K., 2017. economic theory; cost-push inflation. The balance, pp. 1-2. Blinder, A. S. J, W., 1988. Economics; Principles and Policy. San Diego.: Harcourt Brace Jovanovich, Publishers. Dr Econ, 2013. education publications. [Online] Available at: https://www.frbsf.org/education/publications/doctor-econ/ [Accessed 23 April 2018]. muley, R., 2009. economic discussion. [Online] Available at: https://www.economicsdiscussion.net/essays/inflation-essays/essay-on-inflation-types-causes-and-effects/17400 [Accessed 23 April 2018]. Thorp, W. Quandt, R., 1959. The new inflation. north London: s.n.