Consequences of High Inflation

[tcvc]

Hi,

I was looking through eco textbook (Economic Fundamentals in Australia) and noticed that it doesn't explain two of the consequences of high inflation on the study design, the redistributive effect and resource misallocation. If anyone could explain to me how these are consequences of high inflation I would greatly appreciate it.

Cheers

[vox nihili]

Hi,

I was looking through eco textbook (Economic Fundamentals in Australia) and noticed that it doesn't explain two of the consequences of high inflation on the study design, the redistributive effect and resource misallocation. If anyone could explain to me how these are consequences of high inflation I would greatly appreciate it.

Cheers

Do you want to have a crack first at guessing why you think inflation might cause that?

[tcvc]

My guess would be:
Redistributive effect
If high inflation is to occur, people with lower incomes are going to be less able to purchase goods and services as opposed to people with higher incomes due to the erosion of purchasing power. This means that more goods and services are likely to be redistributed towards the wealthier and away from the poor.

Resource Misallocation
High inflation may cause valuable resources to be allocated away from some areas and towards other. They will likely be allocated to areas that are inflating faster as there may be more profits available in the future. These means that some areas will miss out on valuable resources which could increase the rate of inflation.

Those are just guesses at what they are. If someone could give me a concrete answer it would be great
cheers

[Seamus Wong]

Hey,

You are basically correct with both of those responses. Here is what my teacher has explained to us about both of the effects.

The Redistributive Effect relates to the fact that those who receive fixed incomes (e.g. Pensioners living off their super) will experience a decline in their purchasing power due to the fact that their incomes do not rise and fall with changes in general price levels (inflation). As such, their material and non-material living standards fall. Individuals who have flexible incomes, however, will maintain their purchasing power regardless of inflationary effects, and thus will not experience any reduction in their living standards.

Resource Misallocation is likely to occur during periods of high inflation since the returns on non-productive, speculative assets, such as property and shares, are relatively larger than those returns on longer-term investments, such as the expansion of business investment on capital resources. This reduces the efficiency of resource allocation and therefore reduces the long-term economic prosperity of a nation.

[tcvc]

Hey,

You are basically correct with both of those responses. Here is what my teacher has explained to us about both of the effects.

The Redistributive Effect relates to the fact that those who receive fixed incomes (e.g. Pensioners living off their super) will experience a decline in their purchasing power due to the fact that their incomes do not rise and fall with changes in general price levels (inflation). As such, their material and non-material living standards fall. Individuals who have flexible incomes, however, will maintain their purchasing power regardless of inflationary effects, and thus will not experience any reduction in their living standards.

Resource Misallocation is likely to occur during periods of high inflation since the returns on non-productive, speculative assets, such as property and shares, are relatively larger than those returns on longer-term investments, such as the expansion of business investment on capital resources. This reduces the efficiency or resource allocation and therefore reduces the long-term economic prosperity of a nation.

Thanks

[NomotivationF]

Hey here are my notes on this,

Resource misallocation
Investment decisions will be distorted, and a loss of confidence in money as a medium of exchange will lead to a decline in overall economic efficiency. High inflation produces a misallocation of resources as economic agents will constantly look for ways of protecting their current and future levels of income. Inflation encourages a shift away form productive investment that generates economic and employment towards speculative investments such as gold, artwork and collectables. Those who have the most wealth will have the greatest capacity to hedge in this way•High inflation also distorts price signals and reduces the effectiveness of the price system in allocating resources. Consumers are uncertain about whether the price increase was due to changes in quality. Firms may be less confident that rising prices are indicative of increasing opportunity for profit•High inflation also wastes time in terms of firms having to constantly change prices and communicate them to consumers .

Re distributive effects
High rates of inflation creates winners and losers.Inflation causes an arbitrary and unexpected redistribution of income. Unanticipated inflation will lead to an arbitrary redistribution of income in the manner described in the table to the right. However, if economic agents anticipate inflation they can protect their position by making wise decisions.
Winners - Borrowers, strong trade unions, holders of real assets.
Losers - Lenders, weak trade unions, holders of money assets, exporters, fixed income earners

[Seamus Wong]

Hey here are my notes on this,

Resource misallocation
Investment decisions will be distorted, and a loss of confidence in money as a medium of exchange will lead to a decline in overall economic efficiency. High inflation produces a misallocation of resources as economic agents will constantly look for ways of protecting their current and future levels of income. Inflation encourages a shift away form productive investment that generates economic and employment towards speculative investments such as gold, artwork and collectables. Those who have the most wealth will have the greatest capacity to hedge in this way•High inflation also distorts price signals and reduces the effectiveness of the price system in allocating resources. Consumers are uncertain about whether the price increase was due to changes in quality. Firms may be less confident that rising prices are indicative of increasing opportunity for profit•High inflation also wastes time in terms of firms having to constantly change prices and communicate them to consumers .

Re distributive effects
High rates of inflation creates winners and losers.Inflation causes an arbitrary and unexpected redistribution of income. Unanticipated inflation will lead to an arbitrary redistribution of income in the manner described in the table to the right. However, if economic agents anticipate inflation they can protect their position by making wise decisions.
Winners - Borrowers, strong trade unions, holders of real assets.
Losers - Lenders, weak trade unions, holders of money assets, exporters, fixed income earners

What source(s) have you derived these notes from? They seem quite detailed - much more detailed than anything that I can extract from my own textbook.

[NomotivationF]

What source(s) have you derived these notes from? They seem quite detailed - much more detailed than anything that I can extract from my own textbook.

I make my notes from what the teacher tells us and his power-points and sometimes add in extra info from the textbook