During a bout of inflation firms will face higher costs for the resources they need to carry on their business. They will have to pay higher wages to their employees to compensate them for rising prices. Supplies of raw materials and fuel will become more expensive as will rents and rates. The inevitable reaction to this is that the firm has to raise its own prices. This will lead to further demands for higher wages as is called the wage-price spiral. Such cost-push inflation may make the goods and services produced by that enterprise internationally less competitive in terms of price. An economy whose relative or comparative rate of inflation is high may find that it is unable to compete in home or foreign markets because its products are expensive. The economic model tells us that a situation of declining exports and increasing imports will lower the level of activity in the economy with all the consequent side-effects.
VOCABULARY NOTES
impact , ,
waste valuable management time
make more onerous
to avoid holding an asset
whatever the reason
businesses may be hit by () ...
wages unadjusted for inflation
a higher tax bracket , (., )
fiscal drag
they no longer qualify for
to supplement their incomes this leaves less disposable income - index-linked
a reduction in spending (syn. buying, purchasing) power
declining demand
tend to discourage investment
may also be dissuaded from ...
a lack of confidence ()
this fall in investment may be worsened by foreign investment being reduced ,
can lead to businesses having to retain , ()
a bout (syn. period, spell) of inflation
less competitive in terms of price
Assignments
I. Suggest the Russian equivalents
difficulty in valuing assets and stocks; to avoid holding an asset; wages unadjusted for inflation; increased in line with inflation; this may well take a worker into a higher tax bracket; fiscal drag; poverty trap; wages are not index-linked; spending power; the cost of borrowing funds; the wage-price spiral; in terms of price
II. Replace the parts in italics by synonyms
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broad reasons; to identify the reason for this; businesses may be hit by a reduction in sales; wages unadjusted for inflation; in line with; to supplement incomes; will increase withdrawals depressing firms' sales; may be dissuaded from undertaking...
III. Fill in the gaps with the words and expressions from the text
1. Accounting and financial problems can waste __ and make __, __ and __ more __.
2. Businesses may be __ by a reduction in sales.
3. The process, known as __, will cause workers to have less money available.
4. If the wages are not __, they rise less quickly than the rate of inflation.
5. Those selling __, such as food, may be little affected in an inflationary period.
6. High interest rates tend to __ by businesses.
7. The fall in investment may be __ by foreign investment being reduced.
8. Firms will have to pay higher wages to their employees to __ rising prices.
IV. Find in the text English equivalents for the following
- ; ; -; ; - ( ); , ;
; - -
V. Translate into English using all the active possible
1. , , . , , , , , ( , ).
CAN INFLATION BE BENEFICIAL ( )?
We would be simplifying the impact of inflation on business if we suggested that all effects were unfavourable. There is a school of thought, which argues that a low and stable rate of increase in the price level can be beneficial. It believes that a steady rise in money profits produces favourable expectations and 'induces investment as firms seek to expand. This action expands the economy as a whole. Paradoxically, inflation can also reduce the costs of businesses in the short run. Many enterprises incur costs, which are fixed for some period of time for example, the rent of a factory may be fixed at a particular figure for a few years. At a time when the selling price of the firm's product, and hence its sales income, is rising this cost will be falling in real terms and thus stimulating the business.
There is a. further argument that firms may be persuaded to borrow heavily in a period of inflation since the burden of repaying loans is reduced by inflation. If inflation is running annually at 10 per cent, for example, then the real value of the repayments of the loan will fall by approximately that amount each year. This may serve to encourage investment which, since it is an injection into the circular flow, will promote the level of activity. However, in these circumstances interest rates are likely to be high.
Government will accept that low rates of inflation are likely to exist in many economies. Inflation rates of 5 per cent or below arc not considered to be too great a problem, especially if competitor nations are suffering similar rates.
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In spite of the above, the conclusion must be drawn that inflation is, in general, harmful to business and its environment. Indeed, many economists would contend that inflation is the fundamental evil as its presence leads to lack of competitiveness and therefore relatively high unemployment and low rates of growth. This viewpoint has gained in credence in government circles over the last few years. It is for this reason that its control has been a major objective of government economic policy throughout the 1980s and early 1990s.
VOCABULARY NOTES
beneficial ,
unfavourable (ant. favourable)
there is a school of thought, which argues that , ...
and induces investment as firms seek to expand , ()
in the short run
incur costs, which are fixed for some period of time , -
a further argument
to borrow heavily
repaying loans
to contend ,
this viewpoint has gained in credence
a major objective
Assignments
I. Suggest the Russian equivalents
a steady rise in money profits produces favourable expectations; this cost will be falling in real terms; this viewpoint has gained in credence in government circles.
II. Replace the parts in italics by synonyms
a steady rise in money profits induces investment as firms seek to expand;
rates arc not considered to be...; the conclusion must be drawn
III. Fill in the gaps with the words and expressions from the text
1. A steady rise in money profits produces __ and induces __ as firms seek to expand.
2. There is a __ argument that firms may be __ to borrow heavily in a period of inflation.
3. Many economists would __ that inflation is the fundamental __.
4. This viewpoint has __ in government circles over the last few years.
IV. Find in the text English equivalents for the following ; ; ; , ;
