The economy is defined as the enormous set of interconnected consumption activities and production that help in identifying how the scarce resources are being allocated, thus, this definition is also known as the economic system. There are various contributing factors that make economy, one of the most important function of every nation. This is a representation of how well a country is when it comes to managing the country’s business as a whole. Economics is divided into two major branches. One is the Macroeconomics and the other is Microeconomics. The first branch refers to the study of a large-scale decision pertaining to the economy, while the second branch refers to the study of how individuals make their decisions when it comes to their economic contribution. If Macroeconomics are based on the large-scale economic system, then microeconomics is the smaller version of the system that refers to every person’s decision.
The purpose of this study is to present one of the issues under Macroeconomics, which is Inflation. Advantages and disadvantages will be analyzed in connection to its effect on the economic performance of the country. We argue that Inflation is an economic phenomenon that does not always provide negative effects to both the economy and the people as a whole; rather it serves as a balancing factor of every economy.
Effects of Inflation
Inflation is a common event in every nation’s economy. It is usually referred to as the rise or fall of available products and services across different industries, whether public or private sector. Inflation is an important factor that economists look after as it is one of the measurements about how well or bad an economy is performing. Inflation occurs once there is already a sustained increase in the general price of various commodities. Pettinger (n.p.) stated that in tradition, high inflation rate is viewed as one of the damaging factors in the economy. That is because; high inflation rate can negatively affect the consumers’ capability to purchase. The value of their money decreases when the inflation rate is in constant high level.
In contrast, many banks claim that such economic phenomenon somewhat provides advantages. If the occurrence of inflation is at low, there is a chance that products that had higher price may be lowered down if there is a low inflation rate. In fact, some economists suggest that the government must target to increase the inflation rate, especially during economic stagnation (Pettinger, n.p.). Furthermore, an interview with an economics professor, Sandeep Mazumder, low inflation that is steadily low is a good thing because it allows the labor industry to lower down the wages during recession (Walker, n.p.).
This could be a good impact for the big companies that have numerous amounts of employees. However, a positive impact for one may not be the same for the other. Other advantages of inflation include the enabling of boost growth and the enabling of relative price adjustment. The enabling of economic growth is beneficial for the economy as a whole. If an economy will have a long-term low economic inflation, there is a high chance that the recession may arise. That is why; targeting an increased inflation will give way to the economic growth, as there will be a higher flow of cash in the market due to increased product prices. However, some economists are not in favor of this approach due to various reasons.
Inflation that causes price of commodities and services to go higher will provide challenges for the people, especially the minimum wage earners. These are just few of the many negative disadvantages of inflation in the economy. Additionally, if low inflation rate influence the growth of economy, the higher inflation has the ability to reduce the growth of various aspects, such as consumption, output, real balances, investment, and real wages (Braumann 16). Thus, these drawbacks of inflation may also affect the end-consumers and employees of every company. For example, reduced consumption may lead to the reduction of companies’ profitability because of low sales and income. Therefore, there is a possibility that due to reduced profit, many companies may also reduce their workers, which therefore contribute to increased unemployment rate.
Many companies as well as the consumers are not in favor of high inflation due to various reasons. Companies will not be able to sustain their competitiveness if they are not able to sustain the profitability of the organization. On the other hand, the people’s money will have a reduced value due to the increased prices of products and services.
Furthermore, the impact of inflation to real wages can be striking (Braumann 16). However, an institutional justification of this economic behavior claims that such effects are unlikely. That is because wage adjustments could become more frequent, such as monthly or even daily, especially if the inflation is so high. Therefore, companies will also be facing an increased cost due to wage increase requirements. Otherwise, they would have to reduce such cost by reducing their workforce. Baumann (19) also added that the negative effects of inflation continues to arise based on the economic evidence and results of his study about inflation’s impacts.
It may be unnoticeable, but the effects of inflation reach as far as the households’ pocket. Comley (n.p.) said that if the inflation keeps on rising and the wage of the people will remain stagnant on its current rate, then there is a high possibility that the standard of living of every household will be negative affected. That is because inflation itself produces different effects that include unemployment and the inflation of cost of living. These are two contradicting factors that provide unwanted effects to many families.
Moreover, if more and more families will continue to have lower standards of living, much of their consumption of products will also be affected, which will impact the producers and service providers. It was thought that inflation has the power to provide a negative domino effects starting from the manufacturers themselves, down to their end-consumers, and then back to the overall economic performance of the country.
Conclusion
The economic performance of every country can be viewed as an unpredictable occurrence of wide economic possibilities. Simply put, a minor change or movement in the economic performance could mean a large effect down to the people. Inflation may be good at some point, especially when there is a constant low inflation rate. However, considerably high inflation can be damaging, not only to the consumers, but for the economy as a whole. That is why; the influential factors that affect the movement of inflation, such as large companies and the government itself must collaborate in order to have a manageable, beneficial inflation rate, which is not too high that companies will be forced to increase wages or cut down their workforce because such event can be damaging to the general public.
Works Cited
Braumann, Benedikt. Real Effects of High Inflation. Washington: International Monetary Fund, Western Hemisphere Department, 2000. Web. <https://www.imf.org/external/pubs/ft/wp/2000/wp0085.pdf>.
Comley, Pete. "How inflation affects your everyday life." The Telegraph 16 July 2013: n. pag. Web. <http://www.telegraph.co.uk/finance/personalfinance/comment/10181832/How-inflation-affects-your-everyday-life.html>.
Pettinger, Tejvan. "Inflation: Advantages and Disadvantages." Economics Help. N.p., 2 June 2014. Web. 15 Apr. 2016. <http://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/>.
Walker, Cheryl. "Benefits of Inflation." News Center. Wake Forest University, 19 Apr. 2011. Web. 15 Apr. 2016. <http://news.wfu.edu/2011/04/19/benefits-of-inflation/>.
