Erodes Purchasing Power This first effect of inflation is really just a different way of stating what it is.
Some of the major effects of inflation are as follows: Effects on Redistribution of Income and Wealth 2. Effects on Production 3. Inflation affects different people differently. This is because of the fall in the value of money. When price rises or the value of money falls, some groups of the society gain, some lose and some stand in-between.
Broadly speaking, there are two economic groups in every society, the fixed income group and the flexible income group.
People belonging to the first group lose and those belonging to the second group gain.
The reason is that the price movements in the case of different goods, services, assets, etc. When there is inflation, most prices are rising, but the rates of increase of individual prices differ much. Prices of some goods and services rise faster, of others slowly and of still others remain unchanged.
We discuss below the effects of inflation on redistribution of income and wealth, production, and on the society as a whole. Effects on Redistribution of Income and Wealth: There are two ways to measure the effects of inflation on the redistribution of income and wealth in a society.
First, on the basis of the change in the real value of such factor incomes as wages, salaries, rents, interest, dividends and profits. Second, on the basis of the size distribution of income over time as a result of inflation, i.
Inflation brings about shifts in the distribution of real income from those whose money incomes are relatively inflexible to those whose money incomes are relatively flexible. The poor and middle classes suffer because their wages and salaries are more or less fixed but the prices of commodities continue to rise.
They become more impoverished. On the other hand, businessmen, industrialists, traders, real estate holders, speculators, and others with variable incomes gain during rising prices.
The latter category of persons becomes rich at the cost of the former group. There is unjustified transfer of income and wealth from the poor to the rich. As a result, the rich roll in wealth and indulge in conspicuous consumption, while the poor and middle classes live in abject misery and poverty.
But which income group of society gains or losses from inflation depends on who anticipates inflation and who does not. Those who correctly anticipate inflation, they can adjust their present earnings, buying, borrowing, and lending activities against the loss of income and wealth due to inflation.
They, therefore, do not get hurt by the inflation. Failure to anticipate inflation correctly leads to redistribution of income and wealth.Consumers spend less Production declines There are income redistributions, fall in the real incomes, decrease in interest rates, increase in borrowing cost, a rise in wage inflation, uncertainty in business and increase in business competitiveness.
i) Discuss the effects of inflation on consumers in the country. One should wonder how the average wage earner is going to survive in the city with the arbitrary hikes in food prices, not only in Kuala Lumpur but word has it that food prices are generally 20 to 30% higher over in East Malaysia.
Many governments have set their central banks a target for a low but positive rate of inflation.
They believe that persistently high inflation can have damaging economic and social consequences. Overall, a high and volatile rate of inflation is widely considered to be damaging for an economy that.
Many governments have set their central banks a target for a low but positive rate of ashio-midori.com believe that persistently high inflation can have damaging economic and social consequences..
Income redistribution: One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society.
This happen . To understand the effects of inflation, consider the following example of the purchasing power of $ in , compared to today. According to the Bureau of Labor Statistics consumer price index, prices in are percent higher than prices in Some of the major effects of inflation are as follows: 1.
Effects on Redistribution of Income and Wealth 2. Effects on Production 3. Other Effects! Inflation affects different people differently. This is because of the fall in the value of money. When price rises or the value of money falls, some.