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Inflation can either mean an increase in money supply or an increase in price levels. It is measured as an annual percentage increase. Therefore, when there is an increase in food price of inflation, there are two effective theories that cause the problems. Thus, there are economic concepts that are geared towards the problem. However, these concepts that are being applied should be evaluated in a most effective an efficient manner.
Further on in the project you will read and get more understanding of each particular heading on “Food Prices Rising”. The references provided opportunity for further reading and explanation on the concepts in this paper.
Problems of Food Prices Rising in Inflation and The Reason Why it Consider as an Economic One.
Article: Food Prices Rising
What is Inflation?
According to www.inflation.com, inflation can either mean an increase in money supply or an increase in price levels. It is measured as an annual percentage increase. However, as inflation rises, every dollar that’s own buys a smaller percentage of a good or service.
Since the value of a dollar does not stay constant where there is inflation, the value of a dollar is observed in terms of purchasing powers, which are real, tangible goods that money can buy. So when a decline in the purchasing power of money occurs, it’s said to be that inflation rises. For example, if the inflation rate is 3% annually, then theoretically a $1 pack of sweets will cost $1.03 in a year. Though the dollar can’t buy the same goods it could beforehand after inflation.
Several variations of inflation are as follow;
Deflation- when the general level of prices is falling (opposite of inflation).
Hyperinflation- unusually rapid inflation can lead to breakdown of a nation’s monetary system in extreme cases.
Causes of Inflation When Food Price Rises
According to www.investopedia.com, the causes of inflation are cause by at least two theories that are generally accepted. These are:
Demand-pull inflation- this theory can be summarized as “two money closing two few goods”. In other words, if demand is growing faster than supply, food prices will therefore increase, and this usually will occurs in growing incomes.
Cost-push inflation- for increase in food prices to maintain their profit margin, companies’ cost must group. Increased cost can include things such as wages, taxes, or increased cost of impacts.
Almost everyone thinks that inflation is evil, but it isn’t necessarily so. Reason being, inflation affects different people in different ways, therefore, it depends on whether inflation is anticipated or unanticipated. Thus, if compensating and the cost isn’t high, the inflation rate is said to corresponds to what the majority of people are expecting (anticipated inflation). For example, bank can vary their interest rates and buyers can negotiate contracts that include automatic wage hikes as their food prices level goes up.
Problems which arise when there is unanticipated inflation:
Creditors lose and debtors gain if the lender doesn’t anticipate inflation correctly. But for those who borrow, this is similar to getting on interest-free loan.
People living off a fixed-income, such as retires, see a declined in their purchasing power and, consequently, their standard of living.
Domestic- products become less competitive only if the inflation rate is greater than that of other countries.
Uncertainty about what will happen next that will makes corporation and consumers less likely to spend and therefore, this will hurt economic output in the long run.
Economic Theories Pertaining to Inflation When Food Prices Rising
Economic theories or models pertaining to inflation are approach on food price when rising. They are as followed:
The excess demand approach- suggests that inflation on food price rising is a situation in which the total demand for goods exceeds the total supply of goods.
The quantity theory of money approach- is the identical or equal relationship between national income estimated at market prices and the velocity of circulation of the money supply. Base on this theory, there is a positive relationship between food price levels and money supply. However, this relationship is previously under the study on money supply. In other words, this is the increase in the quantity of money that causes an inflationary rise in the food price level.
M is the stock of money in circulation
V is the velocity of circulation
P is the general food price level
Y is the total income
In effect, when the money supply increases by a certain percentage the food price levels will also increase by an equal percentage, accordingly there will be a proportionate positive relationship between the money supply and the food price in a given economy.
Keynesian theory-according to Keynesian, an increase in general food price level is created by an increase in the aggregate demand which is over and above the increase aggregate (total) supply. An increase in government expenditure (G), in private consumption (C) and in private investment (I) will create an increase in aggregate demand only if a given economy is at its full employment output level.
However, an inflationary situation is created due to the fact at optimum or full employment of output which a given economy is unable to increase its output or total supply in response to an increase in total demand.
According to the graph above, when the government uses monetary and fiscal policies to improve full employment of production levels, there will be an increase in aggregate demand level of the economy from AD0 TO AD1 which would result in the creation of full employment level of equilibrium output represented at the point E. If the aggregate demand level increases further from AD1 to AD2 the general food price levels shall increase since the employment of production level will remain unchanged at YF. The output level will not change since all resources are fully employed at the point of YF.
An aggregate demand level over and above the full employment of production level will create an inflationary gap of EF. In addition, an aggregate demand below the full employment of production level will create deflationary gap of ED.
Monetarism- this states that when the money supply is increased in order to grow or increased production, and employment, creating an inflationary situation with an economy.
Since the monetarist explains the relationship using the theory of nature rate of unemployment, there will be a level of equilibriums output, employment, and corresponding level of unemployment naturally decided based on features such as resources employment, etc.
The expansionary monetary policies will result in declined in the natural rate of unemployment and increase the production in short run, but the effectiveness of the expansion policies will be limited in the long run and lead to an inflationary situation.
Structuralism- this theory states that the main reason for inflation is the in-elasticity in the structures of the economy. It is mainly used to explain the nature and basics of inflation in developing countries. Reasons for causing the food price rising rates in developing countries is because it is effected by the in-elasticity of the following:
Production level and capacity
Capital for mutations
In-elasticity of the labour force and employment structured
High in-elasticity in the agricultural sector
Scarcity- there exist only a finite amount of resource- human and non- human. Nature does not freely provide as much of everything as people want.
Resources- (factor of production) are scarce factor of production such as.
Land- original fertility and mineral deposits, water and climate
Labour- contributions of humans who work (thinking and doing)
Capital- all manufacturer resources such as building, machines, equipment and improvements to land.
Entrepreneurship- human activity of raising capital, organizing, managing, assembling other factors of production and making basic business policy decisions.
Opportunity Cost- to obtain something or satisfy a want, the highest valued alternative must have in consideration.
Production Possible Curve (PPC) – Which shows the different combinations of goods that a product can produce given its resources and the state of technology.
Thus, the PPC includes the maximum amount of two goods that can be produced if all the resources are used in the most efficient way. Such, all the combinations on and below the PPC are attainable (X, A, B, Z), and the combinations that are above are unattainable (M).
Benefits of Applying the Economic Concepts
Evaluating the Economic Concept using the technologies whereas resources and time factor comes in place. Thus, the output and input methods should be measured in the same basis.
Time factor, an appropriate time period that has to be determined depending on the type of production system, for example, 5-10 months or 12 years. During that period, particular activities, resources and other factor will change and require analysis and monitoring.
In conclusion, when inflation of the food price rises, there will be a decrease in demand supply. Thus, between 2007 and 2008 the Congressional Budget Office found that comparison attempt to meet government mandates at about 10-15 percent of food price inflation has a direct result biofuels production. This unintended consequence has prompted US to speak out against biofuels mandates time and time again.
An outline of the problem of the food prices rising as being research
A recommendation of the economics concepts are being employed to correct the issue of the food price rising on inflation.
Research of the economic theories pertaining to the problem has being evaluated.
The benefits of applying the economics concepts should are binge aware of in order to reduce the food price levels on inflation.
Base on the judgment of the food price rising in inflation, it’s either an increase in money supply or an increase in price levels which is measured as an annual percentage increase. However, as the food price rises, every dollar that’s own buys a smaller percentage off a good or service. It then affects different people in different ways but it depends on whether it is anticipated or unanticipated. Thus, if compensate and the cost isn’t high, the inflation rate is said to corresponds to what the majority of people are expecting (anticipated inflation).
In effect, that’s how the economic theories and the economic concepts come in place to solve the problem of food price rising in an economic problem of inflation.
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