Economics

Disadvantages of Inflation

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

Topics in Economics

Types of capital market: Primary market and secondary market Capital market explained with its functions Basic tools for economic analysis: Graphs explained with its characteristics and importance Basic tools for economic analysis: Tables explained with its characteristics and importance Factors affecting population 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 What is a Market in Economics? Elasticity of supply explained with its types Supply Elasticity: Elasticity of Supply explained


Academic Questions in Economics

Please click here to see all Questions and Answers

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

  • A. Basis Point Rate

  • B. Hike Rate

  • C. Elastic Supply

  • D. Elasticity of Price

  • E. Price Inflation

  • F. Aggregate Supply

The wholesalers can bring about an economy of scale.

  • A. True

  • B. False

Which of the following statement isn't a characteristics of the wholesaler?

  • A. They may have to operate in specific areas or regions accorded them by the producer

  • B. They are often popular in the line of goods they supply

  • C. They are not risk bearers

  • D. They have good storage facilities

  • E. They often pay for goods supplied by the manufacturers in advance

  • F. They usually have business agents or brokers

The wholesalers act as the middlemen in supply chain.

  • A. True

  • B. False

Large retailers who buy directly from manufacturers are termed as _____.

  • A. Wholesale Retailers

  • B. Certified Retailers

  • C. Codified Retailers

  • D. Commodity Retailers

  • E. Manufacturers Retailer

  • F. Conspicuous Retailers

_____ is a market whereby the sellers buy goods in lesser quantities from the wholesalers and sells in bits to the final consumers.

  • A. Commodity

  • B. Retail

  • C. Wholesale

  • D. Labour

  • E. Common

  • F. General

Which of the following is not a financial market?

  • A. Money Market

  • B. Bond Market

  • C. Foreign Exchange Market

  • D. Virtual Market

  • E. Capital Market

  • F. Stock Exchange Market

A _____ market provides a platform whereby job seekers link up with employers in an attempt to be hired.

  • A. Wholesale market

  • B. Bond market

  • C. Physical market

  • D. Virtual market

  • E. Factor Market

  • F. Labor Market



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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Amazing facts in Economics


Notable points in Economics

A unitary elasticity of supply is seen when a change in price brings about a corresponding and proportional change in the quantity of goods or services supplied.

The graph below shows a unit elasticity of supply:
Unit Elastic Supply Curve - Len Academy

Below is an instance of a unitary elasticity of supply:

  • If a 100% increase in the price of wheat translates into a 100% increase in the production and supply of wheat, then the supply elasticity is said to be unitary elastic and its value is equal to 1.

Unitary elasticity is always equal to 1, that is: Es = 1

The supply curve runs diagonally and will pass through the center.

Supply elasticity is defined as the rate at which an increase in price of goods translates into its increased production and availability in the market. Supply elasticity is also termed as price elasticity of supply.

Consider the statements below:

  • If a 100% increase in the price of rice translates into a 100% increase in the production and supply of rice, the supply elasticity is said to be unitary elastic and its value is equal to 1.

  • If a 100% increase in the price of rice translates into a 50% increase in the production and supply (quantity) of rice, the supply elasticity is said to be inelastic and its value will be greater than zero and less than 1. In this case, the exact value is 0.5: (value of change in the quantity of rice divided by value of change in price of rice = 50/100 = 0.5).

  • Please read on supply elasticity here

The individual demand schedule is a table that shows the demand of a commodity that an individual (consumer) purchased at various prices, and at a particular time.

The table below shows an individual demand schedule:

Price in Naira (of a tuber of yam)

Quantity demanded (per week)

500

5

400

10

300

15

200

20

100

25

The market demand schedule is also referred to as an aggregate demand schedule, total demand schedule or composite demand schedule.

This is a table that shows the different commodities purchased by all the consumers or customers in the market.

The market demand schedule is the summation of the individual demand schedules, showing the demand of different customers for a commodity at a particular price. It is shown in the table below:

Unit price of commodity (Naira)

Quantity demanded by consumer A (QA)

Quantity demanded by consumer A (QB)

Market demand (QA +  QB)

50

20

15

35

40

40

30

70

30

60

45

105

20

80

60

140

10

100

75

175

 

From the above table, notice that when the unit price of the commodity was 50 Naira, consumer A demanded 20 quantities while consumer B demanded 15 quantities.

Please read more on demand schedule here.

Below are definitions of demand from the perspective of some notable professors:

The demand for goods is a schedule of the amounts that buyers would be willing to purchase at all possible prices at any one instant of a time.

Professor Mayers

Demand is the various quantities of goods that would be purchased per time period at different prices in a given market.

Professor Hibdon

The demand for anything, at a given price is the amount of it which will be bought per unit of time at the price.

Professor Benham

Generally, demand is defined as the willingness of a person, buyer or consumer to buy a specific quantity of goods or service at a given price and time.

From the above definitions, we can infer that the definition of demand is referenced to three major factors. These are:

  1. Quantity of Goods Demanded

  2. Price

  3. Time

Please read more on the concept of demand here.