The Causes of Inflation and Their Effects
When a currency sees a reduction in its purchasing power, the economy in said to go through a phase of inflation.
The causes of inflation can be two chief factors, namely demand pull and cost push.
To understand these reasons better, let us look at inflation a bit more closely and then examine these causes and effects of inflation on the economy.
What Is Inflation? When a country's economy sees a lot of money being introduced in the market that does not correspond to the assets held by the economy itself, the money experiences depreciation and its purchasing power goes down.
This obviously results in the increment of prices of commodities and services.
In other words, the amount of gold that the currency will be able to buy per unit will go down.
This reduces the purchasing power of the currency.
With this knowledge at our disposal, let us look at the chief causes of inflation.
Demand Pull Inflation This is one of the main causes of inflation seen by any economy.
When a commodity experiences a demand that is much higher than the supply, the prices will definitely go up, making the commodity more expensive.
On a broader scale, when the economy of a country is not able to fulfill the demands of the market in relation to the goods and services, the price of the goods and services go up, resulting in depreciation in the buying power of money.
Cost Push Inflation Cost push inflation is another reason for inflation of any economy.
As the name suggests, in this type of inflation the prices of the products and services go up due to the increase in the cost factor behind them.
This increment is observed mainly due to the hike in the employee wages of potential companies.
Such increase in the wages is generally a result of the influential employers and labor unions of large companies.
The Effects Both the above causes of inflation have similar effects on the economy of a nation.
The effects of inflation may be more visible to you as an individual with the increase in your expenses, but it is not limited to you alone.
The whole country is affected by inflation with the chances of economic growth of the country going down.
With the costs of production and operation increasing for the businesses, they suffer a setback in their growth.
On the other hand, foreign investment suffers as well, with the economy losing the competitiveness in producing goods that are priced higher than other countries.
On the whole, the causes of inflation can harm the economy and limit the growth required by a country.
The causes of inflation can be two chief factors, namely demand pull and cost push.
To understand these reasons better, let us look at inflation a bit more closely and then examine these causes and effects of inflation on the economy.
What Is Inflation? When a country's economy sees a lot of money being introduced in the market that does not correspond to the assets held by the economy itself, the money experiences depreciation and its purchasing power goes down.
This obviously results in the increment of prices of commodities and services.
In other words, the amount of gold that the currency will be able to buy per unit will go down.
This reduces the purchasing power of the currency.
With this knowledge at our disposal, let us look at the chief causes of inflation.
Demand Pull Inflation This is one of the main causes of inflation seen by any economy.
When a commodity experiences a demand that is much higher than the supply, the prices will definitely go up, making the commodity more expensive.
On a broader scale, when the economy of a country is not able to fulfill the demands of the market in relation to the goods and services, the price of the goods and services go up, resulting in depreciation in the buying power of money.
Cost Push Inflation Cost push inflation is another reason for inflation of any economy.
As the name suggests, in this type of inflation the prices of the products and services go up due to the increase in the cost factor behind them.
This increment is observed mainly due to the hike in the employee wages of potential companies.
Such increase in the wages is generally a result of the influential employers and labor unions of large companies.
The Effects Both the above causes of inflation have similar effects on the economy of a nation.
The effects of inflation may be more visible to you as an individual with the increase in your expenses, but it is not limited to you alone.
The whole country is affected by inflation with the chances of economic growth of the country going down.
With the costs of production and operation increasing for the businesses, they suffer a setback in their growth.
On the other hand, foreign investment suffers as well, with the economy losing the competitiveness in producing goods that are priced higher than other countries.
On the whole, the causes of inflation can harm the economy and limit the growth required by a country.
