Economics

Disadvantages of Inflation

len Alfred Ajibola - 19th October, 2020 @ 04:39 PM

Topics in Economics

Advantages of Inflation Disadvantages of Inflation Concept of Inflation in Economics Scheme of work for Economics, SS1, First Term Scheme of work for Economics, SS1, Second Term Scheme of Work for Economics, SS1, Third Term Functions of the Wholesaler Advantages and Disadvantages of the Wholesaler Wholesale Market: Who is a Wholesaler? Characteristics of the Wholesaler Retail Market: Who is a Retailer and Examples of Retailers Market: Types of Market Market - What is a Market in Economics? Elasticity of Supply: Types of Supply Elasticity Supply Elasticity: Elasticity of Supply explained Demand Schedule - Types of Demand Schedule Demand: What is Demand? Law of Demand Concept and Types of Cost Supply, Supply Curve and Law of Supply What is a Black Market, Its advantages and disadvantages


Academic Questions in Economics

Please check out our Test Your Knowledge page to see all Questions and Answers

The concept of  Ceteris Paribus Assumption in economics states that _____.

  • A. Supply and Demand are antagonistic

  • B. When given two choice of similar products with the same price (assuming all other factors are constant), you will prefer to buy that with a lower price

  • C. Supply and Demand are agonistic

  • D. When given two choice of dissimilar products with the same price (assuming all other factors are constant), you will prefer to buy that which you need most

  • E. When given two choice of similar products with the different prices (assuming all other factors are constant), you will prefer to buy that with a lower price

  • F. When given two choice of dissimilar products with the different prices (assuming all other factors are constant), you will prefer to buy that with a lower price

The willingness of a person to buy a specific quantity of goods or services at a given price and time is termed _____.

  • A. Scale of preference

  • B. Economies of scale

  • C. Opportunity Cost

  • D. Cost

  • E. Supply

  • F. Demand

Costs generally treated as expenses in business are termed _____.

  • A. Fixed cost

  • B. Variable cost

  • C. Sunk cost

  • D. Direct cost

  • E. Private cost

  • F. Outlay cost

When an entrepreneur pays cash (money) for materials needed for production, such money is termed as an _____ cost.

  • A. Accounting

  • B. Entrepreneurship

  • C. Economic

  • D. Outlay

  • E. Opportunity

  • F. Incremental

A government mandated maximum price for goods or services is termed _____.

  • A. Price height

  • B. Price maxima

  • C. Price ceiling

  • D. Price level

  • E. Price finale

  • F. Price top-zone

The quantity of supplied services or goods will increase as the price increases and they will decrease as the price decreases provided all other factors remain constant.

The above statement is attributed to the _____.

  • A. Law of price increase and price decrease

  • B. Law of product quantity

  • C. Law of demand

  • D. Law of supply

  • E. Law of quantity demanded and supplied in relation to price

  • F. Law of purchases on services and goods

The following statements are true concerning explicit opportunity cost except _____.

  • A. They are recorded in the accounts book

  • B. It is a type of cost

  • C. They may also be referred to as 'out of pocket' cost

  • D. They are utilized as factors of production

  • E. Money spent on wages, salaries and raw materials are examples of explicit opportunity cost

  • F. Explicit opportunity cost are always utilized for investment

Needs / Wants

Cost (Naira)

 Phone

 50,000

 Console Game

 120,000

 Laptop

 80,000

 Ipad

 100,000

 Smart watch

 85,000

 Ipod

 40,000

 

Which of the following statement is incorrect concerning the table?

  • A. Ipod is the least important need of the individual

  • B. If the individual has 200,000 Naira at hand, then the laptop, iPad, smart watch and iPod will all be considered as opportunity cost

  • C. If the individual has 480,000 Naira, he or she will purchase all the items in the table

  • D. Console game is the most important need of the individual

  • E. The table shows a scale of preference

  • F. The individual needs an ipod

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Inflation:

Although inflation can have a devastating effect on a nation's economy, it can also offer some benefits when utilized appropriately in an economy. Ironically, deflation (an opposite to inflation) can impact negatively on a nation's economy as it eventually leads it into recession.

It is important to state that inflation is necessary for a nation's economic growth. The problem here is the level or rate of inflation. Infact, low to medium inflation rates can be good for a nation while a high rate of inflation (hyperinflation) ultimately destroys the nation's economy.

You can read on black market, it's advantages and disadvantages here.

Note: Inflation will always result into a redistribution of purchasing power; and as a result, certain people or organization benefits from it while others suffer eventually.

In this article, we will focus on the disadvantages of inflation; but just before that, it will be a good idea if we understood what inflation really is.

Inflation is defined as a gradual and sustained rise in the price of goods and services in relation to their availability.

Please read more on the concept of inflation here.

 

Disadvantages of Inflation

 

  • People who hold on to large volume of money (cash) suffers

Individuals who hold on to large amount of cash, be it in their homes, offices or a safe box will eventually lose value for their money when inflation creeps into their economy.

Just before inflation, the value of money is always greater. For instance, let's assume a thousand naira could get you a bag (before inflation). However, the price of this bag will increase during inflation but yet, the cash which had been hidden somewhere remains the same. For this reason, the same bag may sell for two thousand naira (₦2,000) during inflation, thus resulting into a loss of monetary value.

You can read on scale of preference and opportunity cost here.

 

  • The rate of inflation growth may become unsustainable

This may result from the events of an economic boom. An instance of an economic boom in Nigeria occured during the period of 'oil boom'. Before this period, the Nigerian Naira had a higher value than the American Dollar. 

During the period of oil boom (1970s), Nigeria abandoned most of her agricultural exports and focused mainly on oil. Fast forward to 2020, the Nigerian nation has become a massive importation country and as a result, one American Dollar ($1) equals ₦385 in the parallel market.

The above paragraph explains why the Nigerian Government spend more on recurrent expenditure and less on capital budget.

Please read more on balance of trade and balance of payments here.

Based on the above fact, the cost of living has become high in Nigeria while the minimum wage remains low.

 

  • Inflation reduces the value of savings

People who received a fixed interest rate from their bank savings may also suffer during the periods of inflation.

As an instance, if an individual has a savings bank account that pays 2% interest rate monthly, such person may actually benefit at the initial stages (when there isn't inflation in the economy). The problem arises when inflation rises to 4%. In this case, the individual loses 2% on his or her monthly savings.

However, the interest might still look good from the account holder's perspective but in reality, he or she spends more (4% more) and receives less (2% interest) in savings. This will even be worsened when there's tax deduction on such savings.

Please read on bank notes and coins as methods of payment here.

 

  • People on minimum wages may suffer

If the minimum wage for a country is ₦20,000 (when there isn't inflation), the recipient may feel contented; but the question is:

What happens to the minimum wage when there's an hyperinflation?

Ideally, the government is meant to increase the minimum wage in a corresponding value as the inflation rate but this isn't always the case in some countries; thus the residents receive less (in salary) and pay more for products and services.

Please read on the concept and types of cost here.

Note: Those who receive a fixed minimum wage (or salary) during inflation may delve into criminal acts in order to make ends meet.

Please read more on reputation and how to build a good reputation here.

 

  • Pensioners suffer during inflation

Pensioners typically receive a fixed pension over a long period of time. During the period of inflation (where the price of goods and services are increased), the pensioners receive the same amount of money (as pension) but end up spending more. For this reason, pensions are often called defined benefit plan.

Note: Nowadays, the 'defined benefit plan' is becoming obsolete as it's been replaced by a defined contribution plan. Inflation may have little effect on pensioners with 'defined contribution plan'.

You can read on the definitions and scopes of commerce here.

 

  • Inflation discourages economic growth and long term investment

When an economy has an uncertain and confusing periods of high inflation, investors becomes discouraged from investing their hard earned money into such economy.

Note: Investing in a hyperinflated country may result in dalayed profits (from such investment). The investors could even end up at a loss in a constantly inflated economy.

You can read on production and examples of production here.

 

  • Economies become uncompetitive as a result of inflation

This instance is particularly important in countries that uses a general currency, (e.g Euro).

When there's an Inflation in one of the economies of the 'Euro-zone' countries, the specific country involved will not be able to devaluate their currency, thus canceling an attempt to restore its economy.

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Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


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Amazing facts in Economics


NOTABLE POINTS IN Economics

A Black market is said to take place when there is illegal buying and selling of goods and services.

Black markets usually take place outside the government's rader and without government's knowledge so as to avoid tax or any other government regulations.

Black market presents the avenue for government prohibited goods like hard drugs, war weapons and firearms to be bought by criminals.

A black market can also occur on the web for cyber criminals or those who are involved in computer hacking. To achieve their malicious aim, these individuals will go into the dark web and purchase or rent their respective hacking tools for a fee. Normally, payments are made in crypto currencies.

However, a black market isn't generally considered as bad. Infact, it has its advantages and disadvantages.

Please read more on black market here

Below are some advantages of black market:

  • Goods and services are sold at a cheaper price.

  • It helps some people make plenty of money.

  • The illegal sales of human organs, for example, the sale of human kidneys have aided in saving some lives.

  • Some people actually depend on black market for their daily bread.

  • Some of the proceeds from black market may been utilized towards the economic growth of a Nation. For instance, schools and hospitals had been from money made from black market.

The law of supply states that:

The quantity of the supplied services or goods will increase as the price increases and they will decrease as the price decreases provided all other factors remain constant.

These constant factors are very important when stating the supply law. They include:

  • The price of Input resources

  • The kind of technology used during production

  • The number of suppliers

  • The number of buyers; and so on.

 

A graph that shows the relationship between the price of a product or service, and its quantity supplied is the supply curve.

Supply curve can be defined as a graphical representation of the direct relationship between the prices of goods and services and the quantity supplied (of such goods and services) within a particular period of time provided all other factors remain constant.

Len Academy - Supply CurvePlease read more on the law of supply and supply curve here

Consider the table below:

Needs / Wants

Cost (Naira)

 Phone

 50,000

 Console Game

 120,000

 Laptop

 80,000

 Ipad

 100,000

 Smart watch

 85,000

 Ipod

 40,000

The above table shows us what a scale of preference would look like.

A scale of preference can be defined as the list of a person's needs or wants written in an order of importance.

You will observe that the person puts his most important needs or wants at the top of the list. Further down the list are his less important needs.

Now, let's imagine that this individual has 170,000 Naira to spend. According to the above scale of preference, the followings can be deduced;

  • A phone will be considered to be the most important; and it costs 50,000. He buys the phone.

  • A console game according to this person is next in importance; and it costs 120,000. He buys the console game.

Another question worth asking is:

  • What happens to his other needs?

This is where the term 'Opportinity Cost comes into play.

Please read more on scale of preference and opportunity cost here.

Scale of Preference can be defined as the list of a person's needs or wants written in an order of importance. 📜✍️

When you have a limited amount of money and could only buy some of the items on your list (the top items on the list); then the remaining items that you didn't buy will be generally considered as your opportunity cost.

Opportunity cost can be defined as the value of the best alternative that a person could have achieved or bought but couldn't achieve after the best choice had been achieved.

Opportunity cost are of two types. They are:

  1. Explicit Opportunity Cost
  2. Implicit Opportunity Cost

Please read on scale of Preference, Opportunity cost and the types of Opportunity cost here