Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Monday, 3 October 2011

effect of inflation

Effects of inflation 

                    i.  Income gap

For individual, inflation will reduce their real income. The situation is getting worse if the increasing in price is greater than increasing in individual income. However, there are groups get the benefit from inflation like businessman, farmers, debtors and shareholders. So, inflation can create the income gap between the rich and poor people. 

                 ii.  Distribution impact

If the inflation occurs, the real interest rates probably low or negative. For savers, which received pension, which owns bond and insurance policy, shall be effected negative. This is because the real saving, pension value, bond value or insurance policy will decline because of low interest rate. 

The debtors will gain benefit because real value of their debt will decline compared to the previous position. The creditors will lose because debt payment real value received has been low of state without inflation.  Loan interest will decrease when the inflation occurs.

               iii. Production

As a result of inflation, profit will increase and this will turn motivate producers to increase production. By increase production, employment will also increase.

               iv.  Balance of trade

Inflation also effected to investment in country. Increase in price level can lead to lack of competitiveness among goods and services exported. This situation can lead to declining in export earnings, then reduce investment of the country.


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