EC103-Topic #2: Inflation and Unemployment

High and volatile inflation and high unemployment are problems that the U.S. has not seen in some time, but continue to be rampant in other parts of the world. There is
A recent special on CNBC showed some of the problems from inflation as it impacts Nike employees in Vietnam. I would like for you to find an example of a country or region in the world where there are problems with regard to either high and volatile inflation or high unemployment. You should then look for the probable causes and proposed solutions to that country’s inflationary and/or unemployment problems. For example, in Vietnam, growth is a leading culprit of causing inflation, and the country has been somewhat successful in battling inflation there.

Questions you might try to answer:

  • What are the problems that go along with high and volatile inflation?
  • How do governments or central banks battle inflation and unemployment? Are their plans successful?
  • Find and example of hyperinflation, how it is battled, or it’s causes and effects through an example.

I would like your statements to be as subjective as possible, or in jargon terms, positive and not normative in nature. Also, remember, I want you to keep your descriptions short, basic, and related to classroom content. Read other students comments before posting, and please leave your name with your posting.

10 thoughts on “EC103-Topic #2: Inflation and Unemployment”

  1. Chinese inflation has reached its highest rate since 1996, after consumer prices rose 7.1 percent in the last month. According to large business owners, the cause for this inflation is rising labor and raw material costs. In the food industry, especially, raw material costs have risen as a result of snow storms and consistently poor harvest weather.With these ensuing inflation issues, China must ask itself what problems that need to be addressed. One of the main problems caused by high inflation is that it hurts people on fixed incomes such as pensioners and students. Inflation decreases the purchasing power of these individuals and, in turn, has a large effect on the GDP. Also, this high inflation will cause China’s exports to become more expensive, as its inflation rates become higher than its trading partners.Lastly, if the inflation rates in China continue to rise, they could experience hyperinflation- which could completely cripple the Chinese Economy.During the 1920’s, Germany served as a prime example of hyperinflation. Following the “London Ultimatum”, Germany was forced to pay reparations annually for their WWI debts, in the form of gold. Quickly, Germany ran into a situation of hyperinflation. The hyperinflation was cured years later when a new currency was introduced. This is an example of hyperinflation successfully being treated by a government. If China is unable to diagnose its current inflation problem, they could be dealing with the burden of hyperinflation sometime in the future. In which case, they will have to undergo significant economic changes in order to recover.-James R. O’Connell

  2. I read an article in the New York Times about inflation issues in Zimbabwe called “How Bad Is Inflation in Zimbabwe?” Experts say that Zimbabwe currently has the highest inflation rate in the world and has for a long time. A 69 cent rolls of toilet paper in America costs $145,750 in Zimbabwe. The yearly rate of inflation is heading towards 1000 percent. One of the implications of this high inflation are high unemployment because the wages don’t increase quickly enough to counter the depreciating value of the money. Another indication that the country is in a period hyperinflation is that when people have money they don’t put it into banks, but in investments that will not loose value such as corn meal and sugar. Lastly those who are better off are so because they keep their currency in US dollars. This hyperinflation began for Zimbabwe when the government began seizing commercial farms in 2000. Foreign investors left, manufacturing almost stopped completely, goods and foreign currency need to buy imports fell into short supply and prices increased dramatically. The government continues to try and print enough money to compete with the inflation, but this will only make it worse. The Zimbabwe governments says they have a plan to revive the economy, which would quickly raise billions of American dollars to end the shortage of foreign currency, cut inflation to double digits and end the recessions. One economist says that this is unlikely because cutting spending seems impossible, and raising already high taxes is unthinkable. Zimbabwe should possibly try introducing a new currency as implemented in the 1920s by the German government with the Rentenmark. In this situation the government stated that the new currency had a fixed value and it was accepted.-JGLADSTONE

  3. Mexico is also a country that has to deal with inflation and high unemployment rates. Mexico has been a struggling country for a long time, but experts say that unemployment is affecting young Mexicans and more importantly higher educated Mexicans more than ever. Twenty percent of Mexico’s graduates are having difficulty finding any type of job that matches their education level. The growing rate of unemployment is putting the nation in a pickle when inflation is also growing in the country. Mexico cannot concentrate on growth because that would lead to inflation. One model that can explain this is when the nation concentrated on industrial growth, which rose by 1.6% from January to May (2005), the inflation rate grew to 4.33% over the same period. They are lagging behind other Latin American emerging markets like Chile, Argentina, and Brazil. Mexican researcher, Ibrahim Villasenor from the Complutense University of Madrid (Spain), says, “The structural reforms begun by neo-liberal governments have limited the ability of the economy to create jobs.” Another reason why the rate is so high is simply the fact that the underground market in Mexico is so large. It is so difficult for Mexicans to get high paying jobs; a lot of them go for the cash businesses. This way they can earn money without being taxed by the government. Also, Mexican immigration to other countries, like the United States, is adding to the unemployment problem. Many Mexicans find it easier to tap into the low paying jobs across borders and send the money they make to there families back in Mexico. This money is also in account in the underground market. Some say the best way for Mexico to bounce back is for them to apply what China did and institute government controlled economy. Villasenor says, “Workers may loose some of their rights. But people need their jobs, so production costs would be extremely low.” This may be the best bet for Mexico, not to sound like a communist. It would be best for the government in Mexico to establish a marketplace in which wages are not low and create some sort of initiative for educated people to get higher paying jobs. Adding some sort of policy to revamp Mexican markets is in drastic need. M. Jennings http://www.wharton.universia.net/index.cfm?fa=viewfeature&id=1026&language=english

  4. In response to the ideas of inserting a new currency in struggling economies such as China and Zimbabwe; this technique was recently used in 2003 in order to replace Iraq’s Dinar, which in 2002 was trading at about 2000 to 1 US dollar. The currency overhaul was completed, but it was soon realized that a complete overhaul to the banking infrastructure would need to be done due to the inability to use credit or ATM cards, and the scarcity of functional banks. This causes people to travel with cash in hand, leading to increased robberies by criminals and insurgents. If a country like Zimbabwe were to implement a new currency I could see crime becoming a serious issue. With regards to China, how much would the economy be set back by funding a complete currency overhaul for its 1.3 billion citizens. Inserting new currency may have been a viable solution in the 1920’s, but in today’s global economy it seems unreasonable for a country like China to implement a new currency.-M Levesquehttp://www.globalsecurity.org/military/world/iraq/currency-reform.htm

  5. Some students have already noted that Zimbabwe is and has been experiencing “hyperinflation,” a condition under which prices grow very rapidly. In Zimbabwe, the inflation rate has surged past 1,000% making everyday necessities, such as food, hundreds of thousands of dollars and virtually unobtainable. In conjunction with the other blogs, I would not only like to consider Zimbabwe’s hyperinflation but also would like to consider this in relation to the high unemployment rates, joblessness and implications for the economy. The unemployment rate in Zimbabwe has soared to 80%, putting the country just under Liberia and Nauru, which currently has the highest unemployment rate in the world. The root cause of this high unemployment rate is hyperinflation. First, when inflation began to increase, those who could fled Zimbabwe. In total, three million unhappy people have left the country, usually highly paid professionals such as doctors. Some of these professionals packed up taking their firms and businesses with them, causing a lack of jobs in Zimbabwe. This lack of jobs and hyperinflation has created an informal sector or an underground market for jobs. Zimbabwe’s formal economy consisting of civil service jobs and manufacturing is experiencing negative growth while its informal economy consisting of illegal trading and small businesses is growing rapidly. This informal sector is growing because it is an easy way to start your “own business” and is cost efficient for people who want to purchase goods from a business owner. This informal economy is adding to Zimbabwe’s troubles as it reduces tax revenues in a time when Zimbabwe needs as much money as they can possibly get to cover their increasing budget deficits. L. CurtisSources:http://findarticles.com/p/articles/mi_m1153/is_n3_v121/ai_20655063http://www.indexmundi.com/zimbabwe/unemployment_rate.html

  6. The newly independent Kosovo has a population of 2 million, in which two-thirds of the young people are unemployed. There are many reasons for Kosovo’s economical problems. Not only is business tax the highest in the region, but interest rates are prohibited. This unfriendly business environment only encourages a furthering of the already highly unskilled population. Naturally, exports are minimal. Imports are at €1.3 billion($1.9 billion), whilst exports are only between €90-130 million. With the additional high rate of organized crime, there seems little room for successful economic activity. Kosovo is however equipped with resources of minerals and modern factories, which can only be fully utilized through policy changes, for example by cutting business taxes. The latter will create a more attractive economy for local, and in the long run, foreign investments and businesses. Other long-term policies such as education are essential for bettering the economy. Aims such as creating 76 new schools, are therefore very important and are the focus of Enver Hoxha, minister for education. It is central to understand that unemployment is not the reason, but rather a product of a bad economic environment. Thus, if Kosovo manages to change its policies efficiently, there will be a lowering of unemployment rates and more importantly a bettering of the economy. -K.C. Tidemandhttp://www.economist.com/world/europe/displaystory.cfm?story_id=10727947

  7. To look at Hyperinflation in China, a better example than the People’s Republic of China, would be the Republic of China, the Nationalist government that ruled prior to the Communist takeover. During the 1930s, the Nationalist government issued multiple types of currency, including a silver based coin currency, a valueless paper currency, and a Chinese Gold Unit which was supposed to serve as an international monetary unit. Initially the CGU was pinned to the U.S dollar and banned from being used by the common populace who where prohibited from using anything but the paper currency. In a misguided attempt to improve the value of their national currency, the Nationalist government stopped regulating the CGU and released both currencies into China, the cause was extreme hyperinflation. This hyperinflation remained to plague The Republic of China, until in 1949 the government now in exile in Taiwan created the Taiwan dollar and instituted a massive buyout of all former currencies. This buyout in 1949 wiped the slate clean for the new Taiwan, and allowed ended the hyperinflation that the silver Yuan had caused. The hyperinflation that had plagued The Republic of China prior to the creation of the Taiwan dollar in 1949 undermined the stability of the new government and eventually led to its defeat at the hands of the Chinese Communists who used such mishandling of the Chinese Currency as a rallying cry for support among bankers who would have otherwise supported the Nationalists. Additionally, the super high prices for consumer goods from China’s cities made it impossible for peasants to buy anything, while the government requisitioned foodstuffs from the countryside so that food prices did not inflate to the level of everything else. For a detailed history of both The Republic of China monetary policy, and the Taiwan dollar, see http://www.answers.com/topic/new-taiwan-dollar?cat=biz-fin and http://www.answers.com/topic/chinese-currency?cat=biz-fin.H. Berman

  8. Many countries in Asia including South Korea, Singapore, Hong Kong, China, Taiwan and Indonesia have been experiencing high inflation. Most are noticing the continually rising prices of produce and oil. Part of the cause of the rising produce prices comes from the snowstorms in China, but the problem stems from a bigger issue. High oil prices also cause prices of many other goods to rise. However, a great deal of the problem is tied to the slowing economy and rising inflation in the United States. Asian countries, like Hong Kong face increasing import costs because of the depreciating value of the dollar combined with a decrease in the demand from the US for exports. In the United States, interest rates are falling which allows consumers to use cheaper credit to spend more, further fueling inflation. The dollar is not the only currency causing a problem for Hong Kong. The strength of the Chinese currency compared with the weakness of Hong Kong money is causing prices to raise further, since most of the food in Hong Kong is imported from China. Hong Kong banks are lowering lending rates and the Monetary Authority cut the base rate by a significant 2.25 percentage points. Central banks are reluctant to tighten monetary policy because of the possibility of a recession in the United States. Banks in Asia are not raising interest rates fast enough to keep up with inflation and economists are forced to raise their estimates for trade deficit. – Sarah Keeney

  9. Liberia still feels the effects of its 199 civil war. Liberia, located on the western coast of Africa, is faced with inflation issues, incredibly high unemployment, a crumbling infrastructure, and an enormous national debt. Liberia ranks among the world’s worst in unemployment at around 85% in 2003. Additionally, interest rates are high and foreigners exploit the unskilled population. Since 1998, inflation has risen 13% and interest rates have remained high. According to the Central Bank of Liberia, lending rates were as high as 17.6% in late 2005. Inflation has also increased by 13% since 1998. Making the problem worse is the country’s large debt and miniscule GDP of $2.5 billion per year. Liberia has a large trade deficit. The World Bank claims that in 2006 the country imported over $4.8 billion dollars in good while only exporting $910 million. One cause for the economic downturn was the loss of investors and exports caused by the 1999 civil war. In 2003 the United Nations placed a ban on the country’s diamond exports and enforced the Kimberly Process Certification Scheme (KPCS), which essentially shut down Liberia’s diamond industry, increasing unemployment and lowering the country’s output. Poor labor unions exacerbate the problem of unemployment. The Bridgestone/Firestone debacle, in which the company exploited Liberian workers due to weak unions, demonstrates how the Liberian population receives low income for their labor, again diminishing the nation’s GDP.Steps have been taken to turn the Liberian economy around. Chinese investors agreed to build a manufacturing plant that could possibly employ 50,000 workers. Liberia has taken strides towards completely legitimizing its diamond industry. The UN rescinded its ban upon the country in April of 2007. Complete legitimization of the industry would not only create jobs, but also allow the nation to reap the benefits of its precious resources. Cutting the high lending rates would allow more investments to be made without the fear of having to pay loans at high, unfair rates. Inflation still plagues the Liberian people, who earn approximately $140 dollars per annum, according to a 2006 report by the World Bank. This inflation reduces the people’s already low purchasing power. Finally, the population is moving away from the manufacturing sector of the economy and has started to shift towards small businesses, often comprised of illegal activities. This shift, mainly due to lack of jobs, has created a decrease in the government’s already low tax revenue, making it more difficult for Liberia to settle its debt. Sources:http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/LIBERIAEXTN/0,,menuPK:356220~pagePK:141132~piPK:141109~theSitePK:356194,00.html).D. Cohen

  10. As we all know, high inflation rate can cause many problems. The New York Time, “Rising Inflation Creates Unease in Middle East,” shows consequences of high inflation rate in the Middle East countries caused by a recent oil-price boom. One problem the article states is a poverty crisis. In Saudi Arabia, after the inflation rate rose from 0 percent to 6.5 percent, people become poorer because of the income effect; prices of goods increase while the populations’ income held constant. As a result, one of the big concerns is criminal. Although the government has tried to resolve the problem by increasing wages of public-sector employees or subsidies on food, this is still not enough because the compensations are only for “a fraction of a price increase;” the government did not use the “indexing system” to adjust the real price. Also, the government cannot give subsidies to everyone. Moreover, countries that have to import goods from other countries are affected by a high inflation rate as well. For example, the Middle East’s “reliance on food imports has made it especially vulnerable to the global rise in commodity prices over the past year.” Another problem high inflation rate creates is a corruption problem. People become more careless due to the poverty. As a result, it worsens the economy; government does not do its job as effective as it could do. High inflation also creates violence in many countries. For instance, in Yemen, at least a dozen of people got killed because of the riots over the food price.As we can see, high inflation rate can cause uncountable problems if governments and populations do not react properly.http://www.nytimes.com/2008/02/25/world/middleeast/25economy.html-Korlarp Suwacharangkul.

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