Chile Case

Inflation

In economics, inflation is a persistent continuing increase in a nation's general price level. Inflation results fundamentally from excessive growth of aggregate expenditures for goods and services. It has lot of effects on the economy. For the economy the most desirable if the inflation rate stays low. It is very important that the inflation should be predictable in advance and to be balanced. If the currency exchange prices are predictable, then the participant of the economy can comply with a higher inflation rate and it has not got any negative effect on the economy. Unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

The inflation has effect on the rate of unemployment as well. The Philips curve shows us the relation between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of increase in wages paid to labor in that economy. With high inflation, purchasing power is redistributed from those on fixed incomes such as pensioners towards those with variable incomes whose earnings may better keep pace with the inflation. This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, rising inflation in one economy will cause its exports to become more expensive and effect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.