What, If Any, Is The Link Between Inflation And Output In Your Essay

What, If Any, Is The Link Between Inflation And Output In Your Discussion Refer To Both Theoretical And Empirical Evidence - Essay Example When prices of domestic goods and services are rising fast this will generally be true also of wages, of the prices of the imported goods, of the money supply and of the prices of assets. This is because inflation is one sector of the economy permeates rapidly into other sectors. The phrase â€Å"a high rate of inflation† therefore usually describes a situation in which the money values of all goods in an economy are rising at a fast rate . The view commonly taken is that inflation should be kept close to zero; prices should rise at no more than about 2 to 3 percent a year on average. This is because high inflation affects the economy adversely in a number of ways. For example, it distorts the income distribution; because of the difficulty and risk associated with the complete index-linking of pensions tend to suffer. Also, it biases investment decisions: the cost of borrowing money rises making debt finance expensive in the early years of a project and reducing the incentive to invest. In theory inflation accounting could correct for this, but in practice this has proved difficult to implement.

The growth performance of China Essay Example | Topics and Well Written Essays - 1000 words

The growth performance of China - Essay Example Although, Globalization and liberalization policies were the brain child of the capitalist countries like U.S and UK, China seems to be the number one exploiter of globalization which helped them immensely in achieving tremendous economic growth. This paper analyses the economic growth performances of China. â€Å"During 1997–2005, the PRC’s average annual growth rate in real GDP was 8.9%. During the forecast period of 2005–2010, it was assumed that the PRC continued its historical growth trend of 8.9% per year† (Mai et al, 2010, p.5) (See appendix for more details). China is able to continue or sustain their economic growth even with the help of some unbelievable polices. In fact China has rewritten some of the established economic principles. For example, BACK,(2010) mentioned that â€Å"in any other major economy where growth had accelerated as quickly as China's, higher interest rates would seem inevitable. But in China, authorities have been reluctan t to raise rates† (Back, 2010). In other words, according to traditional economic principles, a country should increase the interest rates when they feel that that their economy is overheated because of over economic exercises. But China did nothing to cool down the over activities in economic sector and kept the interest rates at a lower level until now. Even though economists have some concerns about the over activities in Chinese economic sector and the low interest rates, no big problems were reported so far from China. â€Å"Still, the government isn't dramatically cutting state-supplied credit. This year's loan target, although down considerably from last year, is still more than 50% higher than that of 2008† (Roberts, 2010). Another interesting tactics which helped the economic progress of China is the mass production of consumer goods. When most of the other nations tried to increase the profit by increasing the prices of their products, China did entirely the o pposite thing. They reduced the prices of their commodities and succeeded in selling more goods in international markets than any other countries. Thus they were able to counter the negative effects of price reduction with the help of bulk production and selling. Mai et al (2010) have pointed out that â€Å"the PRC’s exports increase by about 46%and imports by about 45% relative to their respective baseline levels in 2010. Imports and exports of all commodities and services rise relative to their baseline levels† (Mai et al, 2010, p.7) Another important step taken by China for boosting their economic progress was the welcoming of FDI. Even though China is communist country, they have realized that without private capital it is impossible for them to advance further. Foreign investment helped China to polish their production technologies and management skills further. â€Å"The key benefit of foreign investment is improvement in productivity as other players in the hos t industry catch up with the performance standards set by foreign investors† (Mai et al, 2010, p.14) The economic reformation processes undertaken by China under the leadership of Deng in the 80’s and 90’s helped them to speed up their economic progress. Deng succeeded in relieving the industry sector from the complete dominance of the government and lot of small scale industries