Costs of low inflation (1 Viewer)

[hyperbole]

Hey,

My teacher gave us me a sheet of review questions on Economic Issues, and one of the questions asks for the benefits and costs of low inflation. I cant think of any of the costs associated with low inflation, and have consulted numerous textbooks to no avail. Any ideas?

Regards and Thank You!


hyperbole

 

[absolution*]

prices dont rise with real wages which leads to over consumption of domestic goods leading to potential CAD blowouts

prices dont rise with real wages leading to dminished profit margins leading to lower investment in capital goods representing a constraint to the economy

etc.

 

[azza_3761]

I think the major cost of low inflation is high unemployment rates therefore lower productivity and potential growth

 

[monique66]

I think the major cost of low inflation is high unemployment rates therefore lower productivity and potential growth

yeah, i think thats what your teacher is getting at. Low inflation=High unemployment
However this is not the case at the moment as we are experiencing the opposite of stagflation (ie. we have low inflation and unemployment) this is possibly due the increases in productivity over the past few years. (Oh btw, there is no actual term for it)

 

[absolution*]

I think the major cost of low inflation is high unemployment rates therefore lower productivity and potential growth

that is not true, whilst it was once thought that there is an inverse relationship between inflation and unemployment, the phillips curve rejects that theory. more practically, the 1970s evidenced both rising inflation and rising unemployment.

 

[HayleeKate]

Costs of low inflation, hhmm, I dont think its in any of my textbooks either, but heres my educated guesses:
*low inflation/deflation is linked to low economic growth, which obviously has shitloads of bad stuff, but thats not exactly 'costs of low inflation'
*low inlfation/delfation is not good for investors, particularly investors in property/shares etc so, a cost of low inflation would be that its harder for Australia [or any nation] to attract investment, and hence harder to develope resources and industries, hence difficult for economic growth the occur.
*deflation means people who've borrowed money lose out big time, coped with interest repayments and also the money they borrowed still has to be repaid numerically, without consideration of the actualy worth of the figure.

thats a start, good luck building on it!

 

[HayleeKate]

prices dont rise with real wages which leads to over consumption of domestic goods leading to potential CAD blowouts

Can also be good for CAD because our prices remain relatively low, so we offer attractive exports

 

[Rafy]

THe Phillips curve demonstates the relationship between Inflation and Unemployment. Its an inverse relationship

so low inflation would result in high unemploment and all the other adverse effects that come with that

Look at http://en.wikipedia.org/wiki/Phillips_curve

 

[absolution*]

THe Phillips curve demonstates the relationship between Inflation and Unemployment. Its an inverse relationship

so low inflation would result in high unemploment and all the other adverse effects that come with that

Look at http://en.wikipedia.org/wiki/Phillips_curve

That is incorrect. If you look at the diagram you will see the curve shifting thus offsetting the effects of a change in either inflation of unemployment.

 

[black_man]

i remember hearing a little bit about this in class. if inflation is low or the economy is suffering from deflation, there will be a bit of a slowdown in growth, and wages arent apply any sort of pressure, but what it might also cause is a distortion of investment. this means that investors will take money out of productive investments that generate employment and things like that, and place them into non-productive assets which they expect may rise relatively quickly, like artworks or racehorses and things like that.

i think one of the best examples of the effects of low inflation could be japan, which has experienced problems with low inflation and a lack of investment. perhaps a cost of low inflation may be the inhibited growth and wage pressures, therefore causing a little bit of a decline in the standard of living? i'm not too sure

 

[underthebridge]

low inflation does not mean high unemployment, as it is quite possible that microeconomic reform and high productivity growth have moved the philips curve to the left. However low inflation (below 2% I assume) is generally undsesirable because it is assocaited with a slump in aggregate demand, so that little bit of inflation is desirable as it is a sign of growth.

Low inflation in fact reduces a CAD since relatively our exports are cheaper on global markets and domestic goods are cheaper than imports relatively. Thus our international competitiveness is improved, reducing a CAD.

Low inflation will not mean that foeign investors will withdraw money, i believe you are thinking of interest rates. However if interest rates a re low because of low inflation, this will result in withdrawal of cash but low inflation is not the direct cause.

 

[underthebridge]

Hey,

My teacher gave us me a sheet of review questions on Economic Issues, and one of the questions asks for the benefits and costs of low inflation. I cant think of any of the costs associated with low inflation, and have consulted numerous textbooks to no avail. Any ideas?

Regards and Thank You!


hyperbole

I should note that benefits and costs of low inflation aren't listed on the syllabus, you only need to know the effects of inflation (meaning high levels of inflation, not low inflation) and the types and causes of inflation

 

[Rafy]

With the phillips curve, you have to look at it with stagflation in mind as well....

 

[black_man]

Low inflation will not mean that foeign investors will withdraw money, i believe you are thinking of interest rates. However if interest rates a re low because of low inflation, this will result in withdrawal of cash but low inflation is not the direct cause.

i'm sorry, i should have clarified. i was referring to investment in the context of the japanese economy, not specifically foreign investment. i was referring to inflation reflecting low aggregate demand, and hence low investment in the economy.

 

[underthebridge]

no my mistake, I saw the word "investors" and immediately thought foreign.