Types of inflation and the rate of Bangladesh

In 1990 the inflation rate was highest rate 10.522 which average 20.47% after that from 1991 to 1993 the rate was going down slowly like (-21.26, -56.26, -17.80) In 1995 the rate was going little high like but that rate was not recover before rates. In 1996 the rate was again straight going down. From the 1997 to 1998 the rate was going up. After 1999 to 2001 the rate was again going down, and than the rate was going up on 2007. And the last 2 years (2008-2009) the inflation rate of Bangladesh was going down.

Task 02:

A) Inflation:

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money ¿½ a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

B) Explanation:

This area of economics has probably given rise to one of the most significant macroeconomic debates in recent history. There are essentially two causes of inflation.

¿½ Cause of Demand Pull Inflation

¿½ Cause of Cost Push Inflation

Cause of Demand Pull Inflation

Demand is influenced almost entirely by the amount of money in the economy, namely the money supply. They argue that inflation is caused by the amount of money in the economy and hence the spending power of the population exceeding the capacity of the country to produce goods and services. Increased money supply will lead to increases in spending through transmission mechanisms and this will invariably create a situation where aggregate demand for goods and services exceeds the aggregate supply resulting in demand pull inflation. This is shown by the shift of the short-run aggregate demand curve in the diagram below.

Cause of Cost Push Inflation

When firms’ costs increase they will raise their prices in order to maintain the real value of their profits. This will result in the real incomes of the owners of the factors of production e.g. wages, falling. In an attempt to maintain their real income labour will demand higher money wages and this will in turn raise costs. This is often referred to as cost push inflation and may be caused by:

¿½ Increases in factor prices e.g. oil price increase.

¿½ An increase in wage settlements in excess of any increase in productivity.

¿½ A devaluation or depreciation of currency leading to an increase in import prices.

¿½ Interest rate increases will increase the cost of borrowing.

¿½ Indirect taxation or the removal of subsidies.

As in the diagram below.

The Keynesian Argument

They argue that keeping a tight control over money supply so as to control spending is highly questionable. They argue that increases in money supply will lead to increases in spending and providing there are unemployed resources firms will increase output in response.

Finally they argue that basing economic problems, how do you actually go about controlling the amount of money. In a world where there many ways in which

people can borrow money, can monetary policy successfully control the amount available for spending?

The Monetarist View of Inflation

Monetarists put forward two possible explanations of inflation. Firstly they recognise that increases in aggregate demand may lead to demand pull inflation. Increases in spending in excess of the full employment level of output will create shortages (overheating) and firms will raise their prices. This can be shown by a shift of the aggregate demand curve to the right.

Task 03:

A) Under the bed, Not a safe place for your savings

My money at home is a high risk strategy, as most household insurance policies will only cover a limited amount of cash.

The total value of Bank of England banknotes in circulation continues to rise, but their use in transactions is falling gradually.

Most of all, furthermore, keeping your savings in cash will also mean that you are slowly losing money. Holding physical cash gives no protection against inflation, which official consumer prices index figures put at 1.5%. This means that in order to maintain the purchasing power of your hard earned money it needs to be attracting an interest rate of at least inflation, preferably plus whatever tax you pay.

B) This was a predictable Budget which did nothing to simplify the tax regime so businesses are in for another heavy Finance Bill.

May be it can increase the rate of interest.

Every month it should be multi more rather than main money.

C) It was tough to pay the leant money.

If you lent money through Prosper back then, when most of its loans were extended, there¿½s a very high chance that you¿½ve lost money ¿½ in some cases, a lot of money. ¿½Of investors with a portfolio of loans that are an average of at least two years old,¿½ notes Gimein, ¿½folks who have lost money outnumber those who¿½ve earned 6 percent annual return by more than six to one.¿½

One of the big problems that Prosper ran into ¿½ the massive credit crunch and the ensuing Great Recession ¿½ could reasonably be considered to be a one-off event with a low likelihood of happening again. But another is endemic to the model: Prosper borrowers with a given FICO score are inevitably going to be more likely to default on their debts than most other people with the same credit score.

It wasn¿½t meant to be that way. Peer-to-peer lending was meant to create a personal connection between borrower and lender, and therefore make borrowers more likely to repay their debts than people faced with large obligations to hated, faceless banks. But it seems that adverse selection effects overwhelmed the site¿½s attempts to be warm and fuzzy.

Task 04:

A) Inflation is a sustained rise in the average prices of goods within an economy; it can also be seen as a change in the purchasing power of money. Inflation can normally be divided into two types¿½ cost-push and demand-pull. Cost-push happens when prices are pulled up by rising costs, demand-pull happens when demand outstrips supply and prices will therefore have to rise to accommodate this. Monetarists argue that inflation is caused increases in the money supply, the total amount of money circulating in the economy at one time. This is as the believe that any increase in the money supply which is not in line with the growth in output of the economy will lead to inflation. If the money supply was increased in the short-run then consumer spending.

When you introduce money into circulation out of nowhere, it lessens the value of everyone’s money. It is in everybody’s best interest, then, to keep inflation low.

In Germany after WW1, they purposefully hyper-inflated their money. People were bringing money into stores in wheelbarrows just to buy daily groceries. They used money to fuel the fire and even used it as toilet paper, because it was virtually worthless.

We want to tackle inflation because we don’t want that to happen.

Cost Push Inflation

Cost-push inflation occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. There are many reasons why costs might rise:

Rising imported raw materials costs perhaps caused by inflation in countries that are heavily dependent on exports of these commodities or alternatively by a fall in the value of the pound in the foreign exchange markets which increases the UK price of imported inputs.

Higher indirect taxes imposed by the government ¿½ for example a rise in the rate of excise duty on alcohol and cigarettes, an increase in fuel duties or perhaps a rise in the standard rate of Value Added Tax or an extension to the range of products to which VAT is applied.

Demand Pull Inflation

¿½ A reduction in direct or indirect taxation. If direct taxes are reduced consumers have more real disposable income causing demand to rise. A reduction in indirect taxes will mean that a given amount of income will now buy a greater real volume of goods and services.

¿½ Rising consumer confidence and an increase in the rate of growth of house prices ¿½ both of which would lead to an increase in total household demand for goods and services

¿½ Faster economic growth in other countries ¿½ providing a boost to UK exports overseas.

In the first diagram the SRAS curve is drawn as non-linear. In the second, the macroeconomic equilibrium following an outward shift of AD takes the economy beyond the equilibrium at potential GDP. This causes an inflationary gap to appear which then triggers higher wage and other factor costs. The effect of this is to cause an inward shift of SRAS taking real national output back towards a macroeconomic equilibrium at Yfc but with the general price level higher than it was before.

Task 05:

A) Supply-Side Economics:

The term ¿½supply-side economics¿½ is used in two different but related ways. Some use the term to refer to the fact that production (supply) underlies consumption and living standards. In the long run, our income levels reflect our ability to produce goods and services that people value. Higher income levels and living standards cannot be achieved without expansion in output. Virtually all economists accept this proposition and therefore are ¿½supply siders.¿½

¿½Supply-side economics¿½ is also used to describe how changes in marginal tax rates influence economic activity. Supply-side economists believe that high marginal tax rates strongly discourage income, output, and the EFFICIENCY of resource use.

B) Supply-Side Factors

Bangladesh¿½s Factors:

? Rising world food prices

The economy of Bangladesh is dependent on imports for most of the essential food items. Any increase in international prices is, therefore, expected to be passed on to domestic prices through the import channel. We notice a secular increase in the prices of four major food items (rice, wheat, soybean oil and sugar) in the international market during 2003-2007 (Table 3). Since Bangladesh is an import¿½dependent small economy, a positive relationship is expected to exist between world food prices and domestic inflation. As the weight of food items in the consumption is 58.84 percent at the national level, rising world food prices would influence overall inflation in Bangladesh.

? Changes in diesel prices

Global oil prices have been rising steadily having macroeconomic impact on our

economy. Recently, UNDP (2007) has rated Bangladesh as one of the high oil price vulnerable countries. However, two factors are pertinent to assess the impact of oil price change on inflation. Firstly, the current regime of administered pricing of petroleum products1 has involved significant lags in adjusting to world prices. Secondly, the existing construction of CPI excludes diesel, which constitutes more than 60 percent of total annual import of petroleum products. Consequently, its major impact is indirect through

transport fares and irrigation costs. From Figure 5, we observe that generally every hike in diesel price is followed by a rising trend of point-to point inflation in one to three months lag. 1 The pass-through coefficient of diesel is 0.43 meaning that 43 percent of diesel price increase has been passed on to consumers (UNDP, 2007).

? Exchange rate fluctuations

Among supply-side factors, exchange rate is found to be significant in explaining

inflation in Bangladesh. A depreciation of exchange rate translates into a rise in the cost of imported commodities by making foreign goods more expensive, and thus induces an increase in the domestic price level. There is a close association between exchange rate fluctuations and inflation. Since the adoption of a floating exchange rate regime in May 2003, any depreciation of the exchange rate has been associated with a pickup in inflation by increasing the prices

of imported goods. It is evident from Figure 6 that Bangladesh Taka shows a depreciating trend while Indian Rupee displays an appreciating trend during the period from FY98 to FY07. The depreciation of Taka makes imported commodities more expensive having bearing on the domestic price level.

United Kingdom¿½s Factor:

Supply side policies are govt measures to increase productivity in the economy and therefore shift LRAS to the right. Supply side policies usually involve reducing blockages to the free market or overcoming market failure. The key macroeconomic objectives of the govt include low inflation, low unemployment, increasing the sustainable rate of economic growth and minimising the balance of payments disequilibrium.

Privatisation and deregulation were an important supply side policy of the 1980s; they involved selling state owned assets to the private sector and increasing competition within markets. Private companies have a profit incentive to cut costs and be more efficient. Greater competition also causes lower prices and more efficient methods of production, as firms compete for customers. This has enabled lower prices and greater productivity in some industries. However, this policy has been relatively unsuccessful in industries such as Rail and water because they are a natural monopoly and it is difficult to introduce competition into these industries

Another example of supply side policies is education and training, if these policies are adopted then it enables higher labour productivity and improved economic performance. However, this policy may be subject to govt failure; for example, the govt may have poor information and set up inappropriate schemes which do not benefit workers

Task 06:

Economics

The risk of inflation

Contents:

¿½ Inflation rate of Bangladesh

¿½ Definition of inflation

¿½ Impacts of inflation

¿½ Controlling inflation

¿½ Supply side economics

¿½ Source of reference

Inflation rate of Bangladesh since 1990 to 2009:

Definition of inflation:

Impacts of inflation:

Keeping your savings in cash will also mean that you are slowly losing money. Holding physical cash gives no protection against inflation, which official consumer prices index figures put at 1.5%. This means that in order to maintain the purchasing power of your hard earned money it needs to be attracting an interest rate of at least inflation, preferably plus whatever tax you pay.

Controlling inflation:

When you introduce money into circulation out of nowhere, it lessens the value of everyone’s money. It is in everybody’s best interest, then, to keep inflation low.

Supply side economics:

Source of Reference:

Task 01:

? http://www.indexmundi.com/bangladesh/inflation_rate_(consumer_prices).html

Task 02:

? http://en.wikipedia.org/wiki/Inflation

? http://www.bized.co.uk/virtual/dc/copper/theory/th17.htm

Task 03:

? http://www.thisismoney.co.uk/savings-and-banking/ask-an-expert/article.html?in_article_id=495492&in_page_id=111

? By Self

? http://blogs.reuters.com/felix-salmon/2010/01/19/the-problem-with-peer-to-peer-lending/

Task 04:

? http://blog.economics4development.com/how-to-tackle-inflation

? http://uk.answers.yahoo.com/question/index?qid=20100611143716AAzABWG

? http://www.blurtit.com/q929238.html

? http://tutor2u.net/economics/gcse/revision_notes/big_picture_inflation_remedies.htm

? http://tutor2u.net/economics/revision-notes/a2-macro-causes-of-inflation.html

Task 05:

? http://www.econlib.org/library/Enc/SupplySideEconomics.html

? http://bdeconassoc.org/userfiles/pdf/27%20Sources%20of%20Inflation%20in%20Bangladesh-%20Nasiruddin%20Ahmed.pdf

? http://www.economicshelp.org/macroeconomics/as-essays/supply-side-policies-improving-econ.html

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