Economic inflation

economic inflation: is the appearance of a relative change in the general price level based on the use of the consumer price index; Because it contributes to clarifying the quantity of supply of services and goods, whether they are imported or locally produced, and economic inflation is defined as an increase that appears continuously on the prices of services and products, and the government authorities have not been able to impose control over them. From other definitions of economic inflation It is a gradual rise in prices that appears as a result of an expansion in supply or demand or an increase in costs.

Reasons for the emergence of economic inflation

Inflation is one of the economic phenomena caused by a number of reasons, the most important of which are:

The emergence of an increase in aggregate demand: where contemporary theories of inflation explain the emergence of an excess of demand for services and products; In the sense of an increase in demand over supply, the prices of products are determined when an equilibrium appears between demand and supply, and when there is an excess of demand for a specific reason while the supply continues as it is, then the prices of these products rise.

The emergence of a decrease in aggregate supply: It is the occurrence of an economic imbalance resulting from a decrease in aggregate supply;  Due to a number of factors, including:

 full use;  that is, the arrival of the economy to a stage in which it depends on the operation of all factors of production;  This leads to the inability of the production system to provide all the needs of the high demand.

 insufficient production;  As it may lose its flexibility, it cannot provide the market with products in high demand;  Because of the lack of technical factors of production or the use of old production methods that do not meet the modern requirements of the market.

 The lack of productive elements, such as raw materials and personnel.

 The rise in production costs: It is the emergence of an increase in the prices of services and products due to the increase in the costs of production. The increase in production costs is defined as the rise in the prices of services related to production factors at a rate that exceeds their marginal production. The apparent increase in the costs of production factors with stable production leads to a rise in the unitary production cost;  Which leads to an increase in the selling price, and if the selling price does not increase, this leads to a decrease in profits.

 Dependence on imported services and goods: It is a reason that appears in small economic sectors, which are affected by other economic sectors that depend on importing most of their needs of services and products from abroad, and this leads to the emergence of an accelerating rise in the prices of these products and services;  This affects their selling prices, which rise in local markets.

 Wars and Natural Disasters: Wars and natural disasters affect the economy of countries, leading to a decline in production and a decrease in supply.  Which leads to the emergence of an increase in the rate of inflation, which results in a rise in general economic problems, such as the emergence of local currency turmoil and the emergence of a budget deficit.

 The effect of bank interest: where banks do not keep the entire value of deposits, but rather a small percentage of them;  This leads to the issuance of money for deposits in large numbers, resulting in a rise in the money supply, which contributes to the emergence of monetary inflation, and reliance on financial loans as a means to reduce the apparent gap between demand and income.

 The effects of economic inflation

 Economic inflation leads to the emergence of many negatively affecting the economy, including: 

 The effect on the distribution of real national income: It is the total quantities of services and goods obtained by individuals depending on their cash income. The effect of inflation on real national income appears according to the following cases:

 Stability of monetary income with constantly rising prices;  This leads to a continuous decline in income.

 An increase in money income by less than an increase in prices;  This leads to a decrease in real income.

 increase in money income in an equal proportion with the increase in prices;  This leads to the stability of real income.

 increase in money income by a greater proportion than the increase in prices;  This leads to an increase in real income.

 The effect of the purchasing power of money: it is the loss of money for a portion of its purchasing power, resulting from the continuous increase in prices;  Which leads to weak confidence in the national currency, and this encourages individuals to buy products, foreign currencies, and real estate.

 negative impact on the balance of payments;  As a result of the increase in the rates of inflation that leads to an increase in the production of local goods, the competitiveness of these goods in global markets decreases;  This results in a decline in the volume of exports, and an increase in the demand for imported products with low prices compared to similar local products.

 Wealth distribution is affected: it is the random redistribution of the wealth of society during the period of the emergence of inflation, so that individuals sell their real wealth such as real estate as a result of the continuous increase in prices;  In order to maintain the level of consumption they are accustomed to, as for individuals who own financial wealth, they will lose part of their true value;  due to an increase in prices and a decrease in the purchasing power of income.

 Means to reduce inflation

 There are a number of means that help reduce the impact of economic inflation, namely: 

 Relying on the role of the Ministry of Finance in setting the country’s financial policy, which helps determine the sources of revenue, and the surplus resulting from the budget, which leads to a reduction in the amount of available liquidity, and this contributes to reducing the inflation rate.

 Raising the tax rate on luxury products traded by individuals with high incomes.

 reduce government expenditures;  Because it is one of the means that leads to an increase in the money circulating in the markets;  Therefore, reducing expenses contributes to reducing the money circulating in the market.

 Calculating the economic inflation rate

 The economic inflation rate is a percentage in which the value of currencies decreases during a certain period of time, which results in an increase in the rates of general prices for products, and the economic inflation rate is calculated according to the following law:

 Inflation rate = (general price level during a year - general price level in the previous year) / general price level in the previous year times;  100%

 Example: The price level in 2017 reached 500 dinars, compared to its level in 2016, which reached 450 dinars. What is the rate of economic inflation?

 The solution: by applying the previous law and substituting the example data in it: the economic inflation rate = 500 - 450 / 450 times;  100% = 11.11%