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You are here: IGCSE Economics Economic indicators Revision Notes Effects of Inflation

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Effects of Inflation

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Effects of Inflation

Increase in production and investment: Inflation motivates producers increase production as their goods or services will earn more profits (law of supply).

Greater inequality of income: Poor people more adversely affected by inflation. Inflation widens the gap between rich and poor.

Balance of trade: Inflation will cause the prices of the goods and services to go up. It will make the country’s exports less competitive in the international market and have a negative effect on the balance of trade.

Exchange rate: High rate of inflation will affect the external value of money or the exchange rate of the country. Other countries will find the currency more expensive and hence there will be less demand for it and the value of currency will fall.

Who gains, who loses

Gainers


Losers

Businessmen gains as the prices of their products go up and so does their profits.

Farmer’s cost of production will not go up drastically in the short run and thus will ain.

Shareholders will get better returns as businesses will be making more profits.

Governments that are in debt will also find their burden reduced.

Debtors will gain as the real value of money has gone down since the time they took the loan.

Creditors lose as the principle sum received is less in terms of real income.

Wage earners will find their real wages going down and thus lose.

Pensioners usually have a fixed income and will lose.

Students, unemployed people will lose.

Bondholders, those who have purchases bonds from government and companies will lose.

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