Causes and Consequences of Inflation
Effects of Inflation
Increase in production and investment: Inflation motivates producers increase production as their goods or services will earn more profits (law of supply).
Greater inequality of income: Poor people more adversely affected by inflation. Inflation widens the gap between rich and poor.
Balance of trade: Inflation will cause the prices of the goods and services to go up. It will make the country’s exports less competitive in the international market and have a negative effect on the balance of trade.
Exchange rate: High rate of inflation will affect the external value of money or the exchange rate of the country. Other countries will find the currency more expensive and hence there will be less demand for it and the value of currency will fall.
Greater inequality of income: Poor people more adversely affected by inflation. Inflation widens the gap between rich and poor.
Balance of trade: Inflation will cause the prices of the goods and services to go up. It will make the country’s exports less competitive in the international market and have a negative effect on the balance of trade.
Exchange rate: High rate of inflation will affect the external value of money or the exchange rate of the country. Other countries will find the currency more expensive and hence there will be less demand for it and the value of currency will fall.