Question 2(a) Discuss and analysis the factors of inflation in your selected countries
Bangladesh and Vietnam are our selected countries. Inflation is a continuous increase in the general price level of goods and services in the economy. Inflation has three types which are creeping inflation, mild inflation and hyperinflation
Inflation in Bangladesh has a lot of factors. There are wages in the major employment, increase in the supply of money, oil price, low production and higher price of imported commodities.
Based on the factor for increase in wage rate in the major employment, wages in Bangladesh has been increasing for more than the last two decades due to both strong or moderately strong labor union. Due to political, social and cultural tradition and for a humanitarian reason, the Government cannot make a distinction between productive, unproductive, and moderately productive sector in their attempt to increase the wages. Wages increase without any production increase, easily transferred to higher cost of production and higher prices of consumer goods, allowing for sustained inflation. Under the assumption of little or no improvement of workers’ productivity growth, wage inflation at such high level is an indication of cost escalation over time.
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Money supply is an important determinat of inflation. Production in agriculture and fisheries sectors in Bangladesh is still subject to the whims of nature to a notable extent. Therefore supply of money in Bangladesh is increasing every year in order to get it. It has been claimed that one of the main causes of the high food inflation throughout the FY05 was poor harvest of aus, aman and wheat crops.6. The yearly production of these three crops went down by 18.12, 14.76 and 22.11 percent respectively in FY05 over the FY04.7. An instance of price hike due to this fall of production is that the price of aman rice rose within the range of BDT 16 to 19 in FY05 from the range of BDT 14 to 16 in FY04. This excessive rise in the total supply of money may contribute to the cause of high inflationary pressure in Bangladesh.
Oil price is a factor of inflation in countries include international. Oil is a fundamental input of production, it constitutes a significant portion of production cost in every sector of the economy. Although there are some recent adjustments in the administered price of energy products, much of the increased cost of imported fuel has not been passed on to end users, especially on diesel and kerosene. Iraq has the second largest oil field. Oil production in Iraq has been cut by 5,00,000 barrels per day since the U.S. invasion in Iraq for more than three years. Crude and refined oil is used in all sphere of life including manufacturing and production of consumption and material goods. Once increased oil prices, it have increased the cost of production world-wide. The firms and suppliers have no other choices except to raise the price of goods and materials. Therefore it has caused a cost-push inflation.
In Bangladesh the output growth rate is always lower than the population growth rate. This low productions is not only for reason of human resources, weather is also included. As an example, the production of wheat in Bangladesh has declined drastically over the years. Further, except for the Boro, the areas of rice cultivation have declined in recent years. The production of pulses and oilseeds has also declined significantly. Erratic weather in Bangladesh had caused crop failures. Therefore Bangladesh often faced with problem of food shortages. As the net domestic production of food is not sufficient to meet demand such as oil, supply gap of cereals and food items, Bangladesh forced to import these from external markets. Therefore the greater percentage of increase in the populaion has brought about a scarcity of goods. As a result, excess demand occurs that contributes to rise in prices.
Bangladesh has to import huge capital goods, necessary consumer goods and even huge quantity of food grain. The most of the essential food items are imported like sugar, rice, wheat, onion and edible oil and also included machineries, intermediate goods and raw materials used in production. Huge import will increase the price of import. The inflation in foreign countries causes a rise in prices in Bangladesh through the importation of commodities from those countries. When the relationships between import price index and non-food inflation in urban and rural are insignificant, the former is found to have economically as well as statistically highly significant association with the categories of food inflation. In a short word, the reasons for increase in import price are twofold which is exchange rate depreciation and increase in international commodity prices.
Inflation in Vietnam has also a lot of factors. There are excessive service spending and bias allocation in the market, supply and demand mismatch, governement’s increased wages policy, boom of foreign direct investment (FDI) and unbalance money used for economic development and society.
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The monetary factor is excessive service spending and bias allocation in the market. Inflation can be caused if government doesn’t plan and manage amount of money circulation which include in society and commodity. As an example if government allocates too much money to society like education loan, there will caused a loss of money to contribute to eonomy. Excess cash will happen if the number of commodity production is sustaining and has not increased. It will increase consumer purchasing pressure and leads to hyperinflation.
In Vietnam supply and demand mismatch is a problem or cause of inflation pressure in the country. The evident is the signs of overheating the economy such as severe electricity shortage and congested roads and ports, a tight labor market with skilled and semi-skilled labor supply falling far behind demand and a sharp widening of trade and current account deficit. But even year to year core inflation which excludes food and fuel is stimated to have increased by 18% as Benedict Bingham, senior representative of International Monetary Fund (IMF) predicted. Because of the output gap in Vietnam willn’t overcome easily, so he dominant effects of demand effects will persist to the next years. Within this context is important to underline, that persistent excess liquidity in the domestic markets can stoke inflationary expectations over time.
In Vietnam, government has been provided an increased wages policy. Analysis of the movements of nominal wage rate inflation generally gives an idea about the labor cost scenario. In Vietnam, government encourages workers’ salary income can be increased if their performance is improved. Due to increase in salary income, workers have higher chance to spend more on consumption. Demand excess supply. If promotion of distributors and manufactures is helding, it will stimulate the market to increase buying power and creates leverage for a result of demand exceeds supply. After that inflation will happen.
Booming of foreign direct investment (FDI) in Vietnam will have a high rate due to Vietnam often do FDI projects that can pull up their investors’ population. As an evidence, there were more than 16,300 active FDI projects in Vietnam that have collectively pulled in a total of $238 billion. These investors came from 100 countries and territories, and many of them are some of the world’s leading multinational corporations. In 2013, FDI inflow exceeded $22 billion, an increase of more than 35% from 2012. The figures indicate that Vietnam has become a destination of choice for foreign investors Vietnam often do FDI projects that can pull up their investors’ population. Therefore high influx of foreign exchange will often happens into the economy. It will increase money supply and if too high influx of foreign exchange, it will be a reason of inflation. Demand will also rise due to influx of foreign exchange. When a rise in demand cannot meet same level by import will push up the price of product until inflation.
In Vietnam, unbalance money used for economic development and society will always be conducted. Because of wars against French-American in the past, government need to spend enormous money to restore the economy. Therefore money which used for economic development such as subsidiares to help suppliers is less and make a situation of demand exceed supply. The product prices will increase and It leads to the inflation. Therefore the government didn’t use monetary effectively means don’t lead consumers to a way nof controling the production and consumption of the society. Then, national budget will be reduced due to the lack of income or money. Government always lived beyond its means they must use government funds either from local or foreign country to compensate for the expenses.
In conclusion, Bangladesh and Vietnam are easily face the situation of inflation based on those factors above.