Merits of inflation/positive impact/consequences/effects of inflation.
Inflation is associated with both positive and negative effects in an economy.
i). Position effects are generated from mild/creeping/gradual inflation.
ii). Negative effects are generated from hyper/galloping inflation
NB: Whenever a question is asking for the effects of hyper/galloping inflation, we only consider the negative effects of inflation.
- Inflation leads to an increase in the level of investment. This is because during the time of mild inflation, producers make more profits which encourages investment.
This comes about as a result of the increased profits made by the investors during the time of inflation because goods are sold at slightly higher prices.
- Inflation leads to an increase in employment opportunities. As the investors are getting higher profits from mild inflation, they are able to expand their investments and this promotes creation of more jobs for the people.
- It leads to an increase in government revenue from taxation. This comes about as a result of increase in investment and output on which taxes are imposed.
- It leads to an increase in the level of exploitation of the country’s resources. This arises as a result of increased level of investment by the investors so as to make more profits.
- It promotes increase in production of goods and services and hence economic growth. This comes about as a result of increased investment during the time of mild inflation which results into production of more goods and services.
- Inflation promotes/ encourages hard work. This is because people are forced to work harder to get higher incomes so as to afford good and services whose prices are increasing
NB; it forces the people to work harder to meet the rising cost of living.
6. It promotes /encourages creativity and innovativeness. In the economy. This arises as the people look for alternative ways of increasing upon their incomes so as to purchase goods and services whose prices are rising.
7. Inflation lifts the country’s economy out of economic depression. This is because it results into increase in prices which increase income levels and thus increases aggregate demand which enables the country to overcome the depression.
8. Inflation encourages mobility of labour because during periods of inflation, labourers move from job and area to area trying to look for better paying employment opportunities and this helps to reduce labour shortages in some areas.
9. Inflation encourages forced saving in the economy. Since during periods of rising prices, people may forego consumption of some commodities which are not very necessary and therefore money is saved for future use..
10. Borrowers/debtors gain during periods of inflation. This is because they pay back less in real terms compared to what they borrowed
All the time of borrowing, the value of money is still high and the borrower uses more money to buy goods on the market.However by the time the borrower pays back the money, its value will have gone down but he or she would have gained in real terms.
Demerits/Negative Effects/Impacts/Consequences /Implications Of Inflation
Inflation discourages saving in the economy. This is because money loses value during periods of inflation implying that if one saves, he takes back less in real terms when it comes to spending the money he saved.
This is because money loses value during the times of inflation and thus people fear to save because if the money is saved, it is of little use in the future when its value is low.
It leads to loss of confidence in the country’s currency. This is because during the times of inflation, the country’s currency loses value and as a result people and institutions may start using foreign currencies in carrying out transactions.
It leads to a decline in people’s welfare. This is because people buy less goods and services because of the rising cost of living.
Leads to production and consumption of low quality goods. Since they may not afford the better quality goods and services in periods of rising prices, therefore they opt to buy and consume the cheaper, poor quality goods and services.
It worsens the country’s B.O.P. This is because people opt to buy the imported goods which leads to high expenditure abroad while the demand of exports reduces which leads to a reduction in the country’s income from abroad.
Inflation increases income inequality in a country. This is because during periods of inflation, the business people make more profits and become richer while the fixed income earners become poorer and poorer.
Inflation makes government planning difficult. This is because during periods of inflation, funds put a side for implementing projects become inadequate leading to failure of such projects in the country.
Due to hyperinflation, the money previously put aside by the government to finance development projects becomes insufficient. This makes the government to abandon some projects and they are not implemented hence limiting economic growth.
Inflation discourages investment in the country due to the rising costs of production which makes investment unprofitable.
It results into industrial unrest. This is because during periods of high rates of inflation, workers complain/ demand for higher wages which the employer may not be able or willing to grant and thus leading to demonstrations and strikes.
Inflation discourages lending. This is because the creditor or lender loses during periods of inflation as they are paid back less in real terms.
Inflation discourages production/ leads to a decrease in production. This is because of the increased cost of production that discourages investment thus reducing production and output during periods of inflation.
Government becomes unpopular during periods of high rates of inflation which sometimes results into riots and political unrest as people usually blame government for the rising prices/ for failure to control the prices.
It leads to brain drain. This is because educated/ skilled individuals opt to go and work to other countries where the prices are relatedly stable.
It results into malpractices e.g. smuggling, corruption etc. as people try to look for alternative means of survival.
People look for possible opportunities of supplementing their income through illegal means so that they get additional money which can make them survive amidst a high cost of living created by hyperinflation.
People are strained in an attempt to cope up with the rising cost of living. People tend to fore go leisure and engage in income generating activities in order to obtain income to supplement what they are currently earning such that they survive amidst the hyperinflation.
The fixed income earners suffer greatly as real income fall. These individuals who earn fixed incomessufer due to rising cost of living, they continue to receive the same amount of nominal income yet prices of goods and services are rising at a very high rate. Hyperinflation reduces the purchasing power of the fixed income earners.
It leads to unemployment. This is due to some firms closing down due to hyperinflation, the production costs rise at a very high rate. Some firms find it difficult to continue producing and so they close down leading to unemployment.
1a) Distinguish between supposed inflation and structural inflation.
b) Examine the effects of inflation in an economy. 2a) Distinguish between structural and imported inflation
b) Assess the effects/ impacts of inflation.
3a) Differentiate between demand pull and structural inflation.
b) Mention any two effects of demand pull inflation in our country.
4a) Examine the effects of hyper inflation in your country in an economy.