Inflation

Vocabulary notes

		currency — деньги (бумажные деньги и монеты), средство обращения, валюта currency depreciation — обесценение валюты to back the currency — денежная масса
		money supply — денежная масса
		goods and services — товары и услуги
		to redeem — выкупать, погашать; изымать из обращения to redeem bank notes — изымать банкноты из обращения
		income — доход(ы); поступления after-tax (disposable) income — доход после уплаты налогов, располагаемый доход
		profit — прибыль; доход to reduce profit — снижать прибыль
		production costs (pl.) — издержки производства; заводская себестоимость
		raw materials — сырье
		to spend — тратить, затрачивать, расходовать spending — расходы; затраты
		tax — налог to impose taxes — облагать налогами VAT (value added tax) — НДС (налог на добавленную стоимость)
		rate — норма; ставка; курс; темп; пропорция interest rate — процентная ставка, норма процента, ссудный процент inflation rate— темпы роста инфляции; ставка инфляции to lend money at an interest rate — кредитовать под процент
		borrowing — заем, кредит syn. advance, credit
		living standards — уровень жизни
		to save — сберегать; экономить savings (pl) — сбережения, накопления
		productivity — производительность
		balance of payments — платежный баланс

NOTES

		seignorage— прибыль, получаемая казначейством от выпуска денег
		to refer to — относиться to be referred to as — называться
		due to — из-за syn. owing to (the fact that) — из-за (того, что) to be due to smth — быть вызванным (обусловленным) чем-либо
		in terms of smth — (зд.) с точки зрения чего-либо
		in tern — (зд.) в свою очередь
		to be willing (unwilling) to do smth — делать что-либо охотно (неохотно)

Answer the following comprehension questions based on the text.

1. What are the origins of inflation?

2. How can inflation be defined?

3. What may lead to the increase in the supply of money?

4. What may happen if the production costs rise?

5. What situation is described as an inflationary spiral?

6. How can the governments influence the level of prices?

7. What are the costs of inflation?

8. What is the impact of rising inflation on the balance of trade?

Inflation originally referred to the debasement of the currency. When gold was used as currency, gold coins could be collected by the government (e.g. the king or the ruler of the region), melted down, mixed with other metals such as silver, copper or lead, and reissued at the same nominal value. By diluting the gold with other metals, the government could increase the total number of coins issued without also needing to increase the amount of gold used to make them. When the cost of each coin is lowered in this way, the government profits from an increase in seignorage. This practice would increase the money supply but at the same time lower the relative value of each coin. As the relative value of the coins decrease, consumers would need more coins to exchange for the same goods and services. These goods and services would experience a price increase as the value of each coin is reduced.

By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or resource costs of the good, a change in the price of money which then was usually a fluctuation in metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. Following the proliferation of private bank note currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable bank notes outstripped the quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency, and not to a rise in the price of goods (later termed price inflation).

At present inflation may be defined in several ways. In some context it refers to a steady increase in the supply of money. In others it is seen as a situation where demand persistently exceeds supply. It seems best however, to define inflation in terms of its basic symptom — rising prices.

Inflation is, therefore, the term used to describe a rise in the general price level of goods and services and it is measured as an annual percentage increase. Note that individual price increases, for example due to seasonal shortages of food, are not classified as inflation. There are three situations which can result in inflation.

The first is the one in which the demand for goods and services (and the money available to purchase them) exceeds the supply available. There may be а large supply of money available for one or more of several reasons because government spending is relatively high; or because credit is easily available; or because people have relatively high disposable incomes (e.g. incomes after tax plus transfers, such as children's allowances). When customers want to spend money on goods and services but there are not enough of them to satisfy the demand, prices rise accordingly. This is often referred to as "demand-pull inflation".

The second situation which causes inflation is the one in which production costs are rising. Production costs include raw materials, energy and wages. When workers find they cannot afford the goods and services they need owing to the fact that prices are too high, they seek wage increases. Sometimes increased production costs are absorbed in increased productivity or a reduction in profits so that they are not passed on in higher prices. More usually, however, they are not and, hence, prices rise. This is often referred to as "cost-push inflation". These two causes of inflation are often interrelated so that the one situation leads to the other which in turn leads to a recurrence of the first situation. This chain of cause and effect is called an "inflationary spiral".

A third cause of inflation may be government. Governments can affect the level of prices by controlling or regulating them, or by reducing taxes on goods and services and, accordingly, keeping prices down. Alternatively, if a government does not regulate prices or if it imposes higher taxes (such as VAT) it may push prices up. Government also occasionally attempt to control the level of wage increases and hence, keep those production costs down. Lastly as mentioned earlier some people think that higher prices are often due to high government, spending.

Inflation has several consequences.

First, because the real value of money tends to decline, lenders of money, such as banks, are less willing to lend or are willing to do so only at higher interest rates. This makes borrowing more expensive and this may cause prices to rise even further, owing to the increased cost of borrowing.

Second; there are many groups of people whose incomes are fixed or whose incomes tend to rise slowly and infrequently. In a period of inflation the living standards of these people fall and, as a result, they suffer hardship. Old age pensioners are examples of one of these-groups.

Third, when people see the value of money being eroded, they are less willing to save. Accordingly, there is less money available for investment in the new equipment which is frequently necessary if productivity is to increase. It may be more difficult, therefore, to absorb increased production costs. Consequently, prices continue to rise.

Last, the prices of home-produced goods become more expensive than those produced abroad (if the rate of inflation is lower abroad, of course), This being so, they become difficult to export, and, as a result, the balance of payments is affected.

■ Ex. 1. Mark the true (T) and false (F) statements according to the text.

1. In the past inflation resulted from an increase in the amount of circulating currency beyond the needs of trade and decreases in the value of money.

2. Cost-push inflation can be summarized as “to much money chasing too few goods”.

3. Cost-push inflation is associated with hard market conditions and with high trading risks which likely to place a premium on greater efficiency.

4. To maintain stable prices the central banks must maintain strict control over the money supply.

5. Inflation tends to discourage borrowing and encourages lending because debtors “lose” and creditors “gain”.

6. Inflation is a serious problem for price-related income investors.

7. Uncertainty about the future purchasing power of money discourages investment and saving.

■ Ex. 2. Answer the question, using information given in the text. Which of the following causes inflation, and what arc the direct effects? Use the correct linking words.

	Cause	Effect
Demand for goods and services exceeds the available supply	YES/NO
Increased production	YES/NO
Increased government spending	YES/NO
A seasonal shortage	YES/NO
Increasing production costs which are not absorbed in higher productivity or reduced profits	YES/NO
Higher taxes on spending and no government control on prices in a period of low productivity	YES/NO