Page 93 - DMGT401Business Environment

Business Environment

Notes Built-in inflation reflects the events of the past, and so might be seen as hangover inflation.
It is also known as 'inertial' inflation, 'inflationary momentum', and even 'structural inflation'.
Besides the above, other causes of inflation are low productivity and expansion of money.

1. Productivity: When productivity falls, it results in diminishing returns of production,
and causes inflationary pressures. Increase in the velocity of money causes inflation and
reduction in efficiency caused by excessive present consumption against investment. That
is, a savings rate that is too low to fund the improvements in production which are
required to keep pace with increases in aggregate demand. Thus, when production can not
keep pace with the demand, inflation takes place.
2. Expansion of Money: Expansion of money or increase in the supply of money in the
economy also results in inflation. A government can finance its spending in three ways:
by raising revenue through taxes, by borrowing from the public by selling government
bonds, or by simply printing money.

Did u know? The revenue raised through the printing of money is called Seigniorage . The
term comes from seigneur, the French word for 'feudal lord'. In the Middle Ages, the lord
had the exclusive right on his manor to coin money. When the government prints money
to finance expenditure, it increases the money supply, which causes inflation.

Besides Seigniorage, the Government/Central Bank can increase the supply of money in the
economy by many other means such as reduction in CRR, SLR, Bank Rate through purchase of
government securities, reduction in personal taxes (income, corporate, dividend) etc. All this
causes inflation.

Caselet R.I.P Zimbabwe Dollar

–by Steve Hanke

"Zimbabwe is in the late stages of a classic hyperinflation. … Inflation is galloping ahead
as the supply of Zimbabwe dollars surges and the demand for them shrinks. Eventually,
the currency will totally collapse as people simply refuse to accept it." In recent months,
facts on the ground have validated this prognostication. The Zimbabwe dollar is dead.
Last year, I developed a hyperinflation index for Zimbabwe. The index began on 5 January
2007, a month before Zimbabwe entered the hyperinflation zone. Due to a lack of reliable
data, I stopped reporting the index on 14 November 2008. This index was based on non-
cash Zimbabwe dollar transactions. These had accounted for the bulk of transactions in
Zimbabwe. By the end of November, however, there were virtually no non-cash Zimbabwe
transactions taking place and the Zimbabwe Stock Exchange had stopped trading. The
non-cash Zimbabwe dollar is, therefore, dead.

Ashes are all that is left of the Zimbabwe dollar - a remnant of paper money. During
Zimbabwe's hyperinflation, foreign currencies replaced the Zimbabwe dollar in a rapid
and spontaneous manner. This "dollarization" process was legalized in late January 2009.
Even though the Zimbabwe paper money remnant circulates alongside foreign currencies,
its real value is tiny, its use is limited, and its value against the U.S. dollar is cut in half
every two days.
Contd...

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