Inflation
Essay Writing Skills - IGCSE Example 1
Case Study: Inflation in Pakistan.
Inflation
Inflation in Pakistan has been a huge problem since 2018. Annual Inflation in Pakistan increased to 13% in Jan 2022. CPI transportation rose to 27.79% in Mar 2022 on April 2021 CPI transportation by 141.52 points. On the other hand, food prices increased from 8.3% in Oct 2021 to 15.3% in March 2022. (Source: https://tradingeconomics.com/pakistan/food-inflation)
Considering the data above, use your knowledge in Economics to evaluate the aftershock of inflation in Pakistan.
The possible evaluation may look as stated below.
Surely an inflation rate of 13% annually will have a greater impact on Pakistan`s population and the economy. Now, if we compare the severity of the inflation with that of the UK`s efforts to curtail the inflation rate to 2% then we might get an understanding of the severity of 13% inflation in Pakistan. Though Pakistan`s economy cannot be compared with that of the UK as Pakistan is considered an underdeveloped country that has got enormous scope to grow faster than the UK to reach the UK`s level of development. As it has got scope to grow, so it is likely that the inflation in Pakistan is likely to be higher, but it should not be beyond 5% as it can impact the living standard of the population in the country.
Anyway, before I get into the evaluation of inflation, let me spare a few words on inflation itself.
Inflation is the rate at which the general level of prices of goods and services rise in the economy. Inflation may occur due to two reasons mainly; first, due to a rise in aggregate demand (AD) within an economy or a fall in aggregate supply (AS) in the economy.
Inflation
The occurrence of Inflation due to a rise in aggregate demand is called demand-pull inflation (Figure 1) and a fall in aggregate supply leading to a rise in price level is called cost-push inflation (Figure 2).
Inflation
Inflation could be bad for an economy particularly cost-push inflation as it decreases the national output leading to a rise in unemployment causing a lower income among people at the same time higher prices for goods and services.
The bad effects of inflation are stated below.
First, inflation causes an increase in the level of prices of goods and services making those expensive for many people and hindering their affordability to maintain their consumption as much as before. This happens due to a reduction in purchasing power of consumers` income if their wages or salaries are not increased in accordance with the price rise. The same is possible in the case of Pakistan as the prices of transportation and foods have increased by 27.79% and 15.3%.
Secondly, there may have a rise in shoe leather costs due to high inflation as with high inflation consumers are bound to shop around to find the goods and services they like at cheaper prices. This means a waste of a significant amount of their time and other resources in Pakistan at an aggregate level to find the best deals for them due to the price level going higher.
Thirdly, higher inflation leading to a lower consumption among those people who can`t afford to make the same purchases as before may cause lower confidence among businesses leading to a decrease in their investment spending. This will cause higher aggregate demand not being matched with the aggregate supply leading to a further worse condition in Pakistan.
Last but not least, when inflation goes higher, the government would try its best to decrease the inflation rate by increasing the interest rate. During this time firms might stop expansion as borrowing funds to expand the business would be costly. At the same time, workers may demand higher wages to match their cost of leaving with a higher level of prices for goods and services. If workers are successful, then, higher wages would increase the cost of production for firms. These factors are likely to discourage firms to go for investment spending and hiring more workers. As a matter of fact, unemployment is likely to increase sooner or later with higher inflation in Pakistan.
However, things may not be that bad with inflation as mentioned above if the price rise is matched with the higher wages. Higher wages leading to a higher income among those people (Consumers) who could not afford to buy the goods and services at higher prices earlier, now be able to make the purchases as usual. This may cause confidence among consumers to be high and can go for the usual level of consumption which may influence the confidence of the firms leading to a positive business environment where firms may like to increase their investment spending. The confidence among firms not only will help to maintain the short-run economic growth but also be helpful to fuel the long-run economic growth.
Furthermore, demand-pull inflation (Figure 1) may cause lower unemployment as firms would employ more workers to deal with the higher inflation led by higher aggregate demand. As a result, unemployment is likely to decrease causing to have higher income among people leading to an improvement in living standards.
One more point to note here is that a high rate of inflation may be bad for an economy but the same will be applicable in the case of a lower rate of inflation. Low inflation may mean lower aggregate demand which may discourage investment spending making the unemployment rate higher and the living standard worse than before.
To conclude, I must say that the inflation rate fluctuates quite often which means the bad effects of inflation may not be continued over a longer period as the govt policies will be designed to rebound the economy after any inflation-related bad effects.
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