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Macro Business Environment 2 Essay - Inflation
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This document contains an essay that had to be made for the subject Macro Environment 2. The topic chosen by me was inflation.
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InflationAs a first-year International Business student, I am expected to write an essay about inflation
for the Macro Business 2 course. In this essay, a basic definition of inflation will be
presented, how inflation is caused will be discussed, an analysis on how inflation affects the
economy will be shown, why inflation is such an important economic indicator will be
discussed, and a contemporary example from the economy will be given to illustrate these
points.
What is inflation?
Sometimes the prices in a country increase, sometimes they decrease.
Inflation is an increase in the general price level. This includes the prices of consumer goods.
The development of the general price level describes the development of the weighted
average of prices in a country. In this context, inflation is an increase in the weighted
average, and deflation is a decrease.
According to Fernando (2020), inflation is the decline of purchasing power of a given
currency over time. A quantitative estimate of the rate at which the decline in purchasing
power occurs can be reflected in the increase of an average price level of a basket of
selected goods and services in an economy over some period of time. The rise in the general
level of prices, often expressed as a percentage means that a unit of currency effectively
buys less than it did in prior periods.
How is inflation caused?
Inflation can have several causes. The most common causes are given below.
When the cost of producing a product increases, the price of that product will also increase.
Several factors can be the reason for a product becoming more expensive. For example,
labor costs. Besides, there may be imported cost inflation. If products that have to be
imported that are needed to make the final product are more expensive than the final
product itself, then this will lead to an increase in the final price. Imported inflation can also
occur if the exchange rate of the currency of the particular country in which the imported
product is purchased increases.
The price of products can be determined by supply and demand. When the demand for a
product increases, the price for that product will also increase. When aggregate demand
rises, it will lead to an increase in the overall price level. This actively demonstrates that
inflation will occur.
For a product without competition, the producer may decide to increase the price of the
product since customers cannot switch to a competitor when the price becomes too high.
This is called a monopolist. If there are many monopolists in a country who decide to raise
the prices of their products, then this will lead to an increase in the overall price level and
consequently to inflation.
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