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Consequences
of Inflation
Inflation
 https://www.youtube.com/watch?v=FcqZ
ynKuqhI
Getting started – South Africa
Reduces purchasing power
 Definition
– The amount of goods and
services that can be bought with a fixed
amount of money.
 If
incomes rise faster than prices this may
not be a problem.
Reduces the value of savings
 If
inflation is higher than interest rates,
people will experience an overall loss in
the value of their savings.
Increased business costs
 If
there is inflation , it generally means
businesses have to pay more for
resources.
 Businesses
can pass this cost on to
consumers but only if the market is not
highly competitive.
Increased business costs
 Workers
will demand more money if there
is a sustained period of inflation.
 This
is because their wages are not
purchasing what they used to.
 Workers
may be tempted to go on strike.
COLA
 Employment
contracts, pension benefits,
and government entitlements (such as
Social Security) can be tied to a cost-ofliving index, typically to the Consumer
Price Index (CPI). A Cost of Living
Allowance (COLA) adjusts salaries based
on changes in a cost-of-living index.
Increased business costs
 Firms
may have to change their price lists
or menu costs.
 Firms
may have to spend more time
looking for lower prices. This involves
looking around or shoe leather costs.
Question 1 – Health and
fitness clubs
Balance of payments
problems
 If
inflation is high in one country, that
country may have difficulty selling their
products in markets abroad.
 The
price of those exports may be
affected by inflation.
 Demand
for exports will likely fall.
Balance of payments
problems

This will have a negative effect on the current
account.

Current account- Part of the balance of
payments where imports and exports are
recorded.

If exports go down and imports go up, this
could lead to an even larger current account
deficit.
Increases in government
spending
 When
prices rise, the government has to
spend more money.
A
lot of government spending is linked to
inflation.
 Index
linking- Where certain government
payments are linked to an increase in RPI
or CPI.
Increases in government
spending
 What
government payments may be
Index Linked?
THE FUNCTIONS OF MONEY
 http://www.bbc.com/news/business-
18827269
The Functions of Money
 Medium
of exchange- It can be
exchanged for goods and services.
 This
is generally more efficient than a pure
barter system.
 In
a barter system there must be a
coincidence of wants before two people
can trade – one must want exactly what
the other has to offer.
The Functions of Money
 Store
of value- Money itself has value. It is
simple to store value in this form.
The Functions of Money
 Unit
of account- Money is used to
measure the value of goods and services.
The Functions of Money
 Standard
for deferred payments- This is
basically buying something on credit.
 The
payment for that good or service can
be deferred or delayed until a different
date.
Inflation`s effect on the
function of money
 Generally
 If
these effects are negative.
money loses its value due to
hyperinflation, it may lose its value as a
medium of exchange.
Inflation`s effect on the
function of money
 If
inflation is high, money will not be a very
good store of value.
 If
inflation is high, the value of certain
goods and services may become
distorted.
Inflation`s effect on the
function of money
 Can
inflation benefit those in debt?
Hyperinflation!!!!!!!!!!!!!!!!!!
 https://www.youtube.com/watch?v=WI1i
5yhwOz8
Economics in practice –
Inflation in Turkey