Inflation

Inflation is generally defined as a persistent rise in the general price level

with no corresponding rise in output, which leads to a corresponding fall in the

purchasing power of money.

In this section we shall look briefly at the problems that inflation causes for

business and consider whether there are any potential benefits for an enterprise

from an inflationary period.

Inflation varies considerably in its extent and severity. Hence, the conse-

quences for the business community differ according to circumstances. Mild inflation of a few per cent each year may pose few difficulties for business. However,

hyperinflation, which entails enormously high rates of inflation, can create almost

insurmountable problems for the government, business, consumers and workers.

In post-war Hungary, the cost of living was published each day and workers were

paid daily so as to avoid the value of their earnings falling. Businesses would have

experienced great difficulty in costing and pricing their production while the incentive for people to save would have been removed.

Economists argue at length about the causes of, and “cures” for, inflation.

They would, however, recognize that two general types of inflation exist:

– Demand-pull inflation;

– Cost-push inflation.

Demand-pull Inflation.

Demand-pull inflation occurs when demand for a nation’s goods and services outstrips that nation’s ability to supply these goods and services. This causes

prices to rise generally as a means of limiting demand to the available supply.

An alternative way that we can look at this type of inflation is to say that it

occurs when injections exceed withdrawals and the economy is already stretched

(i.e. little available labour or factory space) and there is little scope to increase

further its level of activity.

Cost-push Inflation

Alternatively, inflation can be of the cost-push variety. This takes place when

firms face increasing costs. This could be caused by an increase in wages owing to

trade union militancy, the rising costs of imported raw materials and components

or companies pushing up prices in order to improve their profit margins.

MONEY AND BANKING

Money and its Functions.

Although the crucial feature of money is its acceptance as the means of payment or medium of exchange, money has other functions. It serves as a standard of

value, a unit of account, a store of value and as a standard of deferred payment.

We discuss each of the functions of money in turn.

The Medium of Exchange. Money, the medium of exchange, is used in one-half of almost all exchange.

Workers exchange labour services for money. People buy and sell goods in exchange for money. We accept money not to consume it directly but because it can subsequently be used to buy things we do wish to consume. Money is the medium through, which people exchange goods and services. To see that society benefits from a medium of exchange, imagine a barter economy.

A barter economy has no medium of exchange. Goods are traded directly or

swapped for other goods. In a barter economy, the seller and the buyer each must want something the other has to offer. Each person is simultaneously a seller and a buyer. In order to see a film, you must hand over in exchange a good or service that the cinema

manager wants. There has to be a double coincidence of wants. You have to find a

cinema where the manager wants what you have to offer in exchange.

Trading is very expensive in a barter economy. People must spend a lot of

time and effort finding others with whom they can make mutually satisfactory

swaps. Since time and effort are scarce resources, a barter economy is wasteful.

The use of money-any commodity generally accepted in payment for goods, ser-

vices, and debts-makes the trading process simpler and more efficient.

Other Functions of Money.

Money can also serve as a standard of value. Society considers it convenient

to use a monetary unit to determine relative costs of different goods and services.

In this function money appears as the unit of account, is the unit in which prices

are quoted and accounts are kept.

In Russia prices are quoted in roubles; in Britain, in pounds sterling; in the

USA, in US dollars; in France, in French francs. It is usually convenient to use the

units in which the medium of exchange is measured as the unit of account as well.

However there are exceptions. During the rapid German inflation of 1922-1923

when prices in marks were changing very quickly, German shopkeepers found it

more convenient to use dollars as the unit of account. Prices were quoted in dollars

even though payment was made in marks, the German medium of exchange.

The situation in Russia nowadays reminds of that of in Germany.

BANKS AS FINANCIAL INTERMEDIARIES

Banks are financial institutions that accept money deposits and make loans.

Included under the term “banks” are firms such as commercial banks, savings and

loan associations, mutual savings banks, and credit unions.

Banks are important for three reasons:

1. They provide a channel for linking people who want to save with those

who want to invest.

2. They play an important role in determining the money supply.

3. They are a source of the financial innovation that is expanding the ways

in which we can invest our savings.

Banks play a critical role in the creation of money, not buy printing $ 50 bills

but by lending. Banks loans create checking account deposits, a large component

of the money supply.

If you wanted to make a loan to some companies, you would not go directly

to the president of the company and offer a loan. Instead, you would lend your

money to such companies indirectly through financial intermediaries, institutions

such as commercial banks, savings and loan associations, mutual savings banks,

credit unions, insurance companies, mutual funds, pension funds, and finance

companies that borrow funds from people who have saved and in turn make loans

to others.

Banks are the financial intermediaries that the average person interacts with

most frequently. A person who needs a loan to buy a house or a car usually obtains

it from a local bank. Most Americans keep a large proportion of their financial

wealth in banks in the form of checking accounts, savings accounts, or other types

of bank deposits.

Financial intermediation is an important activity in the economy because it

allows funds to be channeled from people who might otherwise not put them to

productive use to people who will. In this way, financial intermediaries help pro-

mote a more efficient and dynamic economy.

Thus, banks are the most important of a number of financial intermediaries

that channel funds from people who might not put them to productive use to

people who can do so. Banks also play a critical role in the creation of money and

have been important in the rapid pace of recent financial innovation.

BANK OF ENGLAND

The Bank of England was established privately in 1694 and chartered by the

government in return for a loan. The bank was also allowed to issue its own notes.

Although started as a private bank, it gradually evolved into a Central Bank.

The Bank of England was the first central bank. It serves as the banker to the

government of the United Kingdom, with sole authority to issue notes in England

and Wales, and also as the banker to the country’s commercial banks. Until 1946

the bank was privately owned, but it had long governed its operations in the na-

tional interest.

From its founding in 1694 it acted as the government’s banker, lending it

money to fund the national debt. It soon acquired a practical monopoly of the note

issue; eventually other banks began keeping deposits with the Bank of England

and using it as a clearing house for their transactions with one another. By the 19th

century, the Bank of England had become a “banker’s bank”. It had also acquired

another function associated with central banking- that of being the “lender of last

resort”, to which other banks could turn for aid when they were hard pressed.

During the 19th century the Bank of England developed techniques for regu-

lating interest rates and the amount of credit issued by itself and by the banking

system generally. As the leading bank in the world’s leading financial center, its

actions were considered critical in maintaining the international gold standard. By

adjusting its discount rate, that is, the interest it charged on loans to commercial borrowers, it was able to affect the international flow of short-term capital. An increase in the discount rate would attract money to London and at the same time discourage borrowers; a reduction in the discount rate would have the opposite effect.

The Bank of England was nationalized in 1946.

Today the bank is able to adjust the country’s supply of money through the

purchase and sale of securities. It also controls interest rates and sets limits on the

amount of bank credit.

4. Нығайту:

Закрепление:

Вставьте пропущенные слова. Переведите предложения.

Banknotes; monetary; central; reserve; group; debt; merchants; deposits;

discount houses; financing.

The Bank of England is the British _____ bank, which was nationalized in

1946. It was originally incorporated in 1694, being set up by a ____ of London

___. Since the mid-19th century it has been the only bank authorized to issue ____.

The Bank conducts ___ policy through open-market operations (acting as lender

of the last resort to the …), and through regulation of the supply of credit by way

of the high interest rate it charges on special ___ called from the commercial

banks. The Bank is also responsible for ___ the notional __ and for holding the

country’s gold ___.

PAYMENT SYSTEMS

CASH

Cash is popular for many types of payments in the United States because it is

readily accepted, convenient, and anonymous. Because most of these transactions

have a low value, cash transactions account for only 0,4 percent of the total value

of all payments.

CHEQUES

Other than cash, the paper cheque is the most frequently used means of pay-

ment in the United States. Because cheques are paper instrument, they must be transported physically between payers and payees and payer’s (collecting) and the payee’s (paying) banks. Inherent in this process are delays, which contribute to float or uncollected funds.

AUTOMATED TELLER MACHINES

The use of ATMs has grown rapidly since their introduction in 1969.

They are now widespread in the United States, and most of the nation’s banks

and thrifts, and to a lesser extent credit unions, provide ATM access to consumers.

In 1987, about 151 million ATM cards were outstanding in the United States.

ATMs are typically installed at depository institutions, supermarkets, conven-

ience stores, shopping centers, airports, and office buildings. Most installed ma-

chines are multipurpose machines, offering several of the following services: cash

withdrawal, deposit, transfer between accounts, cash advance, direct access to a

credit card account, bill payment, and balance inquire.

CREDIT CARDS

Credit cards are not true payment instruments because they do not result in a

direct transfer of funds from the payer to the payee. In the case of bank cards, the

cardholder is granted a loan by the card-issuing bank. The merchant’s bank pays

the merchant, usually at a discount, and subsequently settles with the cardholder’s

bank. Credit cards do, however, displace payment transactions by aggregating

them into single daily or weekly payments to merchants and monthly payments for

consumers.

Credit cards issued by financial institutions, travel and entertainment compa-

nies, and retailers are a safe and convenient substitute for cash and cheques.

CHEQUES

Approximately 30 percent of the cheques written in the United States are de-

posited with the depository institutions on which they are drawn. This percentage

has risen in recent years as a result of bank mergers and acquisitions. The remain-

ing 70 percent of cheques are deposited with another depository institution and

must be collected from the institution on which they are drawn.