Economics Essay Example | Topics and Well Written Essays - 2000 words

Economics - Essay Example Apart from economic factors, cultural and political issues also affect inflation rate. The activities of workers’ union might create pressure on the wage rate preventing any downward movement of the same. Therefore production cost will not come down and hence increase in supply is restrained. An increase in supply of money or credit in the economy can make the incidence of inflation strong in an economy. The global financial crisis which resulted from the excess credit and increasing defaulters especially in the housing loan market led to inflationary pressures owing to increasing demand and cost of basic necessities around the world (Nanda). For the Gulf Countries where oil is a key commodity and factor responsible for growth, the rise in oil prices from 2005-2006 led to increase in related products. The increase in oil prices across the world has been occurring at a rate higher than the depreciation of the dollar. The spot price of oil rose by 171.9 percent ($65.66) and achi eved the highest point in August 2006 (reaching the peak at $76.01). Depreciation of dollar across a wide spread of currencies took place at 13.8 percent (Oxford Business Group 38-39). The paper attempts to compare two different Gulf Countries, Bahrain and UAE, with respect to the incidence and impact of inflation. Inflation The first outcome of inflation is usually reflected in the purchasing power of money. Hence there is a reduction in the real value of a good. Inflation rate which measures the price inflation has both positive and negative impacts on the economy. On one hand it reduces the real value of wealth in hands and on the other it creates an expectation of inflation in future and leads to a fall in savings and investments. If there is increased activity of accumulation of goods in apprehension that price might rise further, then there might be a crisis of supply of products in the market. If one considers the positive effects it may be reflected in adjustments of nominal interest rates which help in controlling recessions. Seeing from the demand side, low and moderate inflation are caused by demand side changes or alteration in the number of suppliers at times of crisis and increase in money supply. Going by the Keynesian viewpoint, demand-pull inflation is brought about by a rise in private and government expenditure leadings to high demand. This reflects a grot hint he economy since such higher demand and favorable market situation will lead to higher investment and growth. However cost push inflation which is brought about by supply side shock (fall in supply) could be owing to some natural calamities or high prices of inputs. For instance a sudden increase in oil prices might affect the supply side of those products for which oil is used as raw material or input. The built-in inflation is brought about by a wage-price circle where workers try to keep prices up in keeping with the market price and employers in turn pass this labor cost on to the consumers in the form of higher prices. The essential way out from inflation is the monetary policy and central banks resort to high interest rates and slowed money supply growth to control inflation. Keynesian school of economics suggest that demand can be increased during recession and decreased during boom in order to control inflation; this might be brought about by both monetary and fiscal policy adjustments (Ball). Inflation in Bahrain Inflation as not really an issue for Bahrain as it