Takaki Sera
Economic HL
IA: China’s Inflation Problem?
This commentary will explore the causes and consequences of the inflation in
China. As the inflation in China has been increasing, the government has been noticing this
constant chaos. In May 2011, the government has decided to help the economy out by
attempting to cool down the inflation. This commentary will evaluate in terms of the pros
and cons of the
The food prices have been increasing with an annual rate of 11.2% during
August, and with the increase in oil prices, has lead to other conflicts and protests as well.
The reason why the Inflation, which is the increase in prices of goods and services which
increases over a period of time, is caused by the increase in aggregate demand increasing
and due to the increase in demand, it causes the economy to increase their prices, and thus
leading to the inflation.
There are two reasons for the inflation to occur. The Demand Pull inflation and
the cost push inflation. The demand-pull, which the AD, Aggregate demand, the total
amount of spending in an economy over a certain period of time, consisting of
Consumption, investment, government spending, and net exports, increases and in this
causes it, is the demand for food, fuel, and housings’ price to increase. And the cost-push
inflation, where the AS, the Aggregate supply, the total amount of production or service in
a economy at a certain period of time. is pulled up as the price increases, causing a situation
called stagflation, when the price increases, as well as a increase in prices.
There are several things that China can do, which has to do with the
supply side or the demand side. For the supply side, they can increase
production, which ‘should’ cause the prices to decrease as there will be more
quantity of the production, like China does, but even more, and for the demand
side, they can either use government spending, on the companies, production,
etc to help China with the economy to decrease the inflation. Lastly they can
increase their export, and start exporting more to other countries, which may
help China to decrease the inflation as the more they import, they would be able
to decrease the money they receive, and would decrease the inflation,
As mentioned in the article, China wishes to do simple things to help
with the inflation. One mentioned was to increase the interest rate on bank and
loans. This means that the citizens would have to pay extra money inorder to
borrow from the banks and the loaners, thus losing more money. This process,
or adjustment in the economy causes a change in the consumers as they would
not want to spend more money, and hopefully this would cause the people to
spend less, eventually will decrease the purchases in the economy, and slowely
decrease the prices for the items.
Also since the imported goods are fairly expensive, the Chinese are
willing to export more, receiving more money and allowing their economy to
receive more money to let it flow within the economy.
Lastly, the Chinese government will likely be worried about increase in
unemployment as a result of increase in interest rate. Because inflation rate
and unemployment rate have inverse relationship, as inflation rate decrease
due to the monetary policy, unemployment rate might increase. Which is not
good for China, as the unemployment rate is fairly high at the moment.
Especially for the vast amount of people in China, it is very tough and are in
severe conditions while they work, with very low pay.
In general, the Chinese government has made a right choice: to tighten
monetary policy. Unless rising inflation was dealt with, China might have
experienced economic bubble: a phenomenon characterized by surges in asset
prices to levels significantly above the fundamental value of that assets. If the
government did not do anything to interfere with situation, it would of caused
something similar to the Great Depression in America, and that would just
cause chaos. China needs to be under control, especially now as they are the
leading country in the Economic world, and they are increasing in their
economic world as we speak.