IGCSE Economics: Consequences Costs and Consequences: ❖ Incomes are falling in real terms. ❖ Rising prices affect people’s purchasing power. How does it affect people? ❖ Pensioners: ➢ These receive a ﬁxed amount from the government monthly. ■ Because they paid taxes all their lives. ➢ They are affected and can no longer purchase as much: ■ Loss of purchasing power because the money that theyreceive is no longer able to buy as much. ❖ Students: ➢ Receive also a ﬁxed income which does not change eventhough prices rise. ➢ They lose purchasing power because the amount of moneythey receive is ﬁxed yet prices keep rising. ❖ Professionals (doctors, sportsmen, etc.): ➢ Will not suffer much: ■ Their skills are in high demand. ■ They have, as such, strong bargaining positions: ● Often they also have trade union support. ■ Thus they can bargain for higher salaries. ❖ Less skilled workers (laborers, etc.): ➢ Their wages will fall in real terms.
➢ Because they have less bargaining power: ■ They are replaceable. ❖ Borrowers: ➢ They are better off: ■ The money that they must repay remains more or lessconstant. ■ But the real value of the money that must be repaidbecomes less and less. ● This same money can buy fewer and fewergoods. ● But only if inﬂation rate exceeds interest rate. ■ Therefore the real value of the debt is falling eventhough the nominal value has increased due tointerest. ❖ Lenders: ➢ They are worse off: ■ The money paid back to them loses no nominal valuebut possesses less real value: ● The money can buy less and less and so is alsoworth less in real terms. ● In real terms they make a loss, but only if interestrates are less than inﬂation rates. ❖ When prices rise people spend more time looking for lower pricedgoods (shoe leather costs): ➢ Thus businesses spend more time and money changing theirprices and price lists. ➢ This is a waste of time for both individuals and businesses. ❖ Income and income distribution are affected: ➢ Fixed income receivers ﬁnd that their real income falls.
❖ Inﬂation causes uncertainty about the future which may causesocial unrest to rise along with inﬂation. What are the causes of the current inﬂation in China? ❖ Rising food and raw material prices: ➢ Cost-push inﬂation. ❖ People hoard food and cooking oil in anticipation of higher pricesin the future (wait and see attitude). ➢ Causes demand to rise but it is a rise not matched by supply. ■ Demand-pull inﬂation. ❖ The Chinese government spent huge amounts during thedepression in 2009 seeking to stimulate demand in the Chineseeconomy. ➢ Now demand has been over-stimulated and demand-pullinﬂation is occurring. ❖ Bank of China blames US monetary policies. ❖ The Chinese banks have lent massive amounts of money out. Imports: ❖ When currency weakens imports become more and moreexpensive: ➢ This is the basis for imported inﬂation which is a form ofcost-push inﬂation. ❖ Hong Kong imports almost everything: ➢ But the USD is not doing very well so the HKD is beingdevalued meaning that imported inﬂation is now a factor inHong Kong. Schools:
❖ School fees increase by 2%. ❖ Inﬂation is at 7%. ❖ Most schools, like businesses, buy things in advance: ➢ If inﬂation gets higher, then the damage dealt is not serious. ❖ Can also choose to turf students out earlier and so cut down onelectricity fees which cannot be paid in advance. ❖ Can also hire teachers with the ability to teach multiple subjectswhich would normally have required multiple teachers. How oil prices can affect us and the economy? ❖ Higher crude oil prices. ❖ Higher reﬁnery costs. ❖ Higher petrol prices. ❖ Higher cost of production. ❖ Higher prices of goods and services, including necessity items,because of cost-push inﬂation. ❖ Less money to spent on luxury items because more money has tobe spent on necessity items. ❖ Less aggregate demand because of decreased expenditure levels. ❖ Higher unemployment: ➢ Decreased expenditure is decreased consumer demand andcauses decreased labor demand because this is a type ofderived demand. ➢ This means that wage rates are lower and unemployment ishigher. HSBC: ❖ They cut 3000 jobs recently:
➢ Their ATM machines are in more demand thus the laborservice is no longer needed. ❖ They could have cut branches.