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UNIVERSITI TEKNOLOGI MARA
FACULTY OF CHEMICAL ENGINEERING
ENGINEERING ECONOMICS OF OIL AND GAS OPERATION
(CGE 660)

HYPERINFLATION

LECTURER’S NAME : MS. HUSNA HAYATI BINTI JARNI

GROUP : EH 2437
SUBMISSION DATE : 21 OCTOBER 2019

NAME STUDENT ID
AZIZAH BINTI ROSLAN 2016691724
MUHAMMAD AFIF BIN AHMAD MURAD 2016691754
NURSHAZWANI SYUHADA BT AL BADRI 2016691734
NOOR SHAMIMI BINTI RAMLI 2016691668
SATIAH A/P WAHAB 2016691696
SITI NUR IZZATY BINTI NAZAR 2016691684
INTRODUCTION
Inflation as an economic and financial phenomenon usually refers to a rising trend in general
prices in a country over a period of time. Hyperinflation is an unusual type of inflation where the
general price rises to unusually high levels that the currency tends to become no longer able to
perform its normal functions in part or entirely. The causes of hyperinflation can easily confuse with
those of inflation, but they are different itself. Hyperinflation is a type of financial crisis that can lead to
economic collapse, and a stabilization program.
WHAT IS HYPERINFLATION?
From quantitative definition,American economist, Philip Cagan (1956) said thathyperinflation
is when a general price level increase 50 percent a month.
From qualitative definition, hyperinflation is a loss of function of money as a store value.
When this happens, the domestic money holders will begin to find alternative assets or forms of
money, asset substitution or currency substitution occurs. In these situation, domestic money may
continue to perform its functions as a unit of account and a medium of exchange. But hyperinflation
also can lead to an outcome where people will abandon the use of national currency in domestic
transactions.
MEASUREMENT OF HYPERINFLATION
Price indicators are important measurement used to study the hyperinflation.There are many price
indicators that are widely used in routine macroeconomic research:
1. Consumer price index (CPI): a general price index consisting of a basket of consumer goods
and services.
2. Producer price index (PPI): a general price index consisting of a basket producer goods,
mainly industrial products, as they are delivered to others.
3. Retail price index (RPI): like CPI, but with the information collected from many retailers. In
earlier times, RPI mainly covered goods.
4. Wholesale price index (WPI): a measurement of prices of a basket of merchandise that is
frequently traded in a country’s wholesale market.
WHAT CAUSES HYPERINFLATION?
The causes of hyperinflation always easily confused with inflation. As the hyperinflation is result
from the inflation, the following are often regarded as afactor:
1. Shortages: excess demand caused by either a demand or supply shock such as a rapid drop
in output due to a natural disaster.
2. Balance of payment shocks: for example, a rapid rise in international oil prices (terms of trade
shock); overvaluation of domestic currency leading to degradation of the currency account
balance; or unsustainable accumulation of foreign debt.
3. Government budget deficit: such as a rapid loss of revenue or an over-whelming increase in
fiscal spending
4. Expansionary monetary policy: financial authorities country adopts a policy of continually
increasing money supply and pushing down interest rates in real terms
5. Paper currency system: governments with paper money system are constantly tempted to
resort to an inflationary policy to finance budgetary needs as and when necessary or
desirable.
Often before a period of hyperinflation, an economy has already experienced substantial inflation,
which the government has already attempted to contain through certain policy measures.
Hyperinflation very rarely occurs suddenly, without any early warning signs. Rather, hyperinflation
usually results from previous inflation that has eventually escalated to an astronomical level.
Therefore, hyperinflation has its own causes, distinctively different from those of “ordinary” inflation,
the following three of which are the most relevant:
1. Policy failure in an inflation stabilization process
 2. Institutional deficiency that causes the public to lose trust in the government and confidence
in a stabilization process
3. International isolation
WHAT ARE THE IMPACTS OF HYPERINFLATION?
Hyperinflation is a process of price jump. The impacts of hyperinflation on an economy
depend on several contingent conditions. If everyone in a society could form correct inflation
expectations and make adjustment in nominal variables such as prices, wages, and interest rates,
hyperinflation would not affect real variables such as output, employment, and income distribution.
Hyperinflation is in anticipated, although people may miscalculate its exact pace and rhythm.
Therefore, the adjustment costs of hyperinflation should be much higher than those of ordinary
inflation. Hyperinflation thus has an uneven impact on economic activity. As hyperinflation continues
to diminish the value of the domestic currency, demand tend to grow rapidly for foreign exchange and
foreign assets, different degrees of access to which result in divergent outcomes for people’s money
holdings and financial investments. Hyperinflation involves a higher frequency of price changes, the
making of shorter-term contracts, and a stronger willingness to default on earlier contracts and
financial obligations when they are linked to non-inflationary monetary unit. Other effect of
hyperinflation is that people hold less and less money relative to the rising price levels.
VENEZUELA: HEADING TO HYPERINFLATION AT THE END OF NATIONAL CURRENCY
Venezuela is the most recent example of hyperinflation. In Venezuela, theprices rose to 41
percent in 2013, 63 percent in 2014, 121 percent in 2015, 481 percent in 2016, 1,642 percent in 2017,
2,880 percent in 2018, and 3,497 percent in 2019. The government increased the money supply by 14
percent in 2017. It is topromote a new cryptocurrency, the "petro," because the bolivar lost nearly all
its value against the U.S. dollar. It can't afford the cost of printing new paper currency. The
International Monetary Fund projected prices to rise 13,000 percent in 2018.
In response, people began using eggs as currency. A carton of eggs was worth 250,000
bolivars compared to 6,740 bolivars in January 2017. Unemployment rose to 21 percent, like the U.S.
rate during the Great Depression.
Venezuela get mess when the former president, Hugo Chávez had instituted price controls for
food and medicine. But mandated prices were so low it forced domestic companies out of business. In
response, the government paid for imports. In 2014, oil prices plummeted. It eroded revenues to the
government-owned oil companies. When the government ran out of cash, it started printing more.
Rather than change its dangerous price and wage controls, President Nicolás Maduro is continuing
unsustainable policies.
ZIMBABWE: A HYPERINFLATION THAT ENDS ITS OWN CURRENCY
Zimbabwe had hyperinflation between 2004 and 2009. The government printed money to pay
for the war in the Congo. Also, droughts and farm confiscation restricted the supply of food and other
locally produced goods. As a result, hyperinflation was worse than in Germany. The inflation rate was
98 percent a day, and prices doubled every 24 hours. It finally ended when the country changed its
currency to the U.S. dollar.
CONCLUSION
Even hyperinflation is very rare, but many people are still worried about it as it can give many
impacts. If hyperinflation is happening, there are three ways that protectfrom any kind of inflation.
Sound financial, but it would help to survive with hyperinflation. First, be prepared by having assets
well-diversified. The assets should be balance among U.S. stock and bonds, international stocks and
bonds, gold and other hard assets, and real estate. Second, keep the passport current. It will be
needed when hyperinflation happen to make the standard of living intolerable. Third, ensure to have a
wide variety of skills and talents. Hyperinflation makes a bartering system necessary when money is
useless. A broad range of practical skills gives an advantage when trading.