Inflation, Specialization, GDP, HDI, and Trade Protection

Inflation

Inflation is a persistent or sustained rise in the general level of prices over a period of time.

Types of Inflation

• Cost-Push Factors: Costs that a business has to meet, such as wages or raw materials.
  • Food Costs: Increase in the wholesale price index of essential food items.
  • Raw Materials: Steel, copper, oil, and gas rising in price.
  • Wage Cost: If the workers don't produce more goods to sell, production costs will rise.
  • Land Cost: Rise in the price of lands.
  • Exchange Rate Cost: The prices of one currency in terms of another currency impact business costs.
• Demand-Pull Inflation: Occurs when rising demand pushes up the prices of goods.

Consequences of Inflation

• Poor: The poor are the first to suffer from inflation.
• People on Fixed Incomes: These are those whose incomes remain the same during periods of inflation (pensioners).
• Savers: For people that save money during inflation, savings lose their value.
• Business: When money starts to lose value quickly, businesses become reluctant to supply on credit.
• Mild Inflation: A small level of inflation is not a bad thing. Rising prices encourage businesses to supply more to the market and help to increase profits.
• Hyperinflation: Periods of high inflation that can dramatically affect an economy, often caused by war.
• Free Trade: Trading without hindrance in the form of barriers such as import tariffs.

Specialization

Advantages

1. Enables increased output.
2. Consumers have access to greater, higher-quality products.
3. Increases the size of the market, enabling economies of scale to take place.
4. Greater efficiency.

Disadvantages

1. A country is vulnerable if it has to rely on imports to meet its needs.
2. Vulnerable if the specialized products can be replaced by alternatives.
3. Areas such as production can be vulnerable if cheaper labor is available elsewhere.
4. Vulnerable to changes in exchange rates.

GDP

GDP is a measure of the total value of goods produced in an economy in a particular period.

HDI

HDI is a method of measuring the quality of life. It has three elements:

1. Standard of living.
2. Life expectancy at birth.
3. Education measured by mean/expected years of schooling.

Criticism: It fails to take into account the impact of economic growth on the environment.

Methods of Trade Protection

• Import Tariffs: Taxes on types of imports increase the cost of importing and increase the price.
• Import Quotas: Quotas set a physical limit on the number of imports.
• Administrative Complexity: The government may require importers to fill in time-consuming paperwork.
• Subsidies: Payments to a domestic producer make domestic goods cheaper, enabling them to be sold at a lower price.
• Embargo: Complete ban on the import of certain goods.