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Impact of Inflation on China's Economy

Keywords: inflation in china, china inflation causes

Chinese inflation is growing too fast

But it's possessed another major side-effect. The Chinese economy is fast overheating. All the extra liquidity is travelling up prices and wages, while property principles have soared. In October, the official figures confirmed China's cost of living climbing by 4. 4% year-on-year. That was the most effective increase in more than 2 yrs.

And the problem may be alternatively worse than this. Fourteen days ago a pundit at the Chinese Academy of Social Sciences, one of the government's top think tanks, said that by its computations the country's consumer price index have been understated by more than 7% within the last five years. And the other day the initial 'Dr Doom', Marc Faber, said he reckons the 'real' Chinese language inflation rate is nearer 10% a year.

Whatever the precise figures, there's no uncertainty inflation is increasing far too fast for comfort for the regulators. The Chinese central loan company has been looking to cool things down softly.

Five times this year it's raised bank reserve requirements, which reduces the total amount that lenders can lend. Yet "the credit brakes are being tapped, not slammed", says the FT. "The federal government could be more aggressive. " In other words, so far the tightening hasn't had a lot of an impact.

The workforce is getting very good stroppier than it once was. Between 2007 and 2008 - the latest available data - labour disputes more than doubled. Food prices are already growing at 10% year-on-year. The Xinhua media agency reported the other day that a basket of 18 staple fruit and vegetables cost 62% more during the first ten times of November than in the same period last year.

So higher wage requirements will probably become more frequent "as almost all of the population lives near the edge", says the FT. In fact, it's starting to look like China's inflation problem has got rather out of hand.

This article is discussing the inflation happening in China and the expenses that it has brought to China. This inflation has triggered severe outcomes to China and we'll be talking about the possible solutions

inflation is a growth in the overall level of prices of goods and services within an economy over a period. When the general price level rises, each product of currency purchases fewer goods and services. As a result, inflation also reflects an erosion in the purchasing power of money - a lack of real value in the inner medium of exchange and unit of account throughout the market. A chief way of measuring price inflation is the inflation rate, the annualized percentage change in an over-all price index (normally the Consumer Price Index) as time passes.

Costs of inflation in China:

When inflation rates are high, teams such as pensioners, households, dependent on communal security benefits, stand lose to a good deal since they are often on fixed incomes. These Chinese language will now be able to purchase significantly less than before (less purchasing power), and can start to demand for higher wages. Only those with strong bargaining positions will be able to bid up for higher wages. Furthermore, people will be able to buy less food items than before which really is a major issue because food is one of the essential necessities in individual life, as with this article it has shown the the costs of food increase 10% year-to-year.

Inflation causes a rise in interest levels and will therefore have a poor influence on investment and output, both that will adversely affect work, as in the article we can easily see that labour disputes have been doubled

Higher inflation means that the firms in China must change their prices to keep up thus far on the purchase price level.

Inflation affects the foreign trade and the exchange rate. Experiencing high rates of inflation, China's domestic products will be less competitive internationally. As the home products' prices boost the demand for the products will fall and therefore the demand for China's money will also fall season, thus influencing the exchange rate.

The cause of inflation in China:

The cause of inflation in China's current economic climate was expansionary monetary policies and rising wages. The inflation in China was caused by "cost-push inflation. This means that the expense of firms increase, in this case it is higher wages, and the businesses are forced to improve prices inorder for the expenses.

Cost-push inflation

If the economy demands higher wages, the bigger costs of labour will transfer the SRAS curve left from SRAS1 to SRAS2. The purchase price level increases from P1 to P2. Higher wages increase consumption and therefore raises aggregate demand from AD0 to Advertising1. The increased spending (and possible expansionary regulations) move the market towards equilibrium at Yfe but at an increased price level. We have now a round of cost-push inflation.

Solution:

In this article, it has shown that China's federal government is wanting its better to avoid this issue but it has been said that it hasn't acquired much of a direct effect.

One of the possible means of lowering inflation is by subsidizing businesses. The government can give out subsidies to business so that the businesses can reduce their costs of creation. This will encourage the businesses to lower their prices and thus avoiding inflation. The condition here's that the government will suffer an enormous reduction if there are many businesses to subsidize.

Another possible solution is by appreciating its money. This is because if it appreciates its money then firms will be able to buy cheaper raw materials and for that reason will have lower costs of development. Thus reducing prices of goods. It can appreciate its money by using its foreign currency reserves to buy its currency which will increase the demand because of its currency. Despite the fact that this method can help businesses to reduce their prices, there are also negative implications.

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