ECO ESSAY Q3 SEAN

(a) Explain the causes of cost-push inflation.

Inflation refers to the sustained increase in the general price level of goods and services
in an economy over time, resulting in a decrease in the purchasing power of money. It's
often measured as an annual percentage increase in prices. Moreover, Cost-push inflation
is a type of inflation caused by rising production costs that lead to an increase in the
prices of goods and services. Unlike demand-pull inflation, which is driven by increased
consumer demand, cost-push inflation is supply driven.

Cost-push inflation is primarily caused by factors that increase the costs of production:
Firstly, an increase in the prices of essential inputs such as oil, raw materials, and energy
can directly raise production costs for businesses. For example, an oil price spike can lead
to higher transportation costs and increased expenses for energy-intensive industries.
Secondly, when labor unions successfully negotiate higher wages for workers, it can lead
to increased labor costs for businesses, particularly in industries with strong labor unions.
Finally, Government policies, such as increased taxes or stricter environmental
regulations, can add to the costs of production, which may be passed on to consumers in
the form of higher prices. These are some reasons that how cost-push inflation can
happen.

Here are some examples: Venezuela faced severe cost-push inflation during the 2010s
due to a combination of factors, including falling oil prices (a major source of
government revenue), economic mismanagement, and currency devaluation. Moreover,
in the USA 1970s, the United States experienced significant cost-push inflation during
the 1970s, primarily due to oil price shocks and rising labor costs.

In summary, cost-push inflation occurs when rising production costs drive up the prices
of goods and services in an economy. This can result from various factors, including
increased input costs, wage increase, and government policies. And two examples
showed how different economies have experienced cost-push inflation under various
reasons and situations.

(b). Discuss the view that deflation is more harmful than inflation.
Here are some consequences of high inflation rate:
Firstly, High inflation rates make it challenging for individuals and businesses to plan for
the future as the value of money becomes unstable. And inflation can redistribute wealth
and income, benefiting debtors (as the real value of debt decreases) and harming savers
and fixed-income earners (as the real value of savings and pensions erodes).
Moreover, due to high inflation rate, people may be incentivized to spend rather than save
due to the eroding value of money, potentially leading to lower savings rates and higher
consumption.

Now, I offer some results of high deflation: Deflation increases the real burden of debt
since the nominal debt remains fixed while the value of money increases. This can lead to
debt defaults and financial instability. Also, falling prices can reduce business revenues,
leading to bankruptcies and layoffs. This results in cyclical unemployment, which can be
difficult to reverse. Deflation can also lead to wealth and income redistribution,
benefiting savers and creditors while hurting debtors. Furthermore, People may postpone
spending as they anticipate lower prices in the future, leading to higher savings rates and
lower consumption, which can exacerbate economic downturns.

Now, I will provide two examples of both inflation and deflation, Firstly, Germany
experienced hyperinflation in the early 1920s, leading to astronomical price increases and
the collapse of the German mark. However, the United States experienced deflation
during the Great Depression, contributing to a serious economic downturn.

The view that deflation is more harmful than inflation often depends on the context and
the severity of these economic conditions. In the short term, high inflation can lead to
economic instability, erode savings, and disrupt economic planning. However, it may be
less damaging than deflation in terms of immediate economic consequences. Deflation,
on the other hand, can lead to a vicious cycle of falling demand, increased debt burdens,
and prolonged economic stagnation. It can be especially challenging to combat and
recover from.

In conclusion, both high inflation and deflation have negative consequences, and the
severity of these consequences depends on the scale, duration, and the policy responses
taken by governments and central banks. Therefore, the key is to maintain price stability
within a reasonable range to avoid the most damaging effects of both inflation and
deflation.