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Economics Tuition – Bishan Tuition Centres – Explain the impact of a rise in oil price on inflation and unemployment

Explain the impact of a rise in oil price on inflation and unemployment.

When there is a rise in oil prices, the cost of production is increased which will lower aggregate supply, resulting in an excess demand condition, thus raising general price level. Hence, cost-push inflation arises.

An oil price hike leads to inflationary pressures. The increase in the price of raw materials and natural resources, such as crude oil, leads to an increase in manufacturing and transportation costs for many industries. Consequently, producers will pass on the increase in cost of production to consumers in the form of higher prices and inflationary pressures ensue, as illustrated by upward shift of the horizontal portion of the aggregate supply curve.

Oil price hike also leads to higher unemployment. For firms that are unable to pass on the increased cost of production to consumers will have to scale on their production process, including labour. A prolonged oil price hike will lead to the erosion of comparative advantage for firms in these industries which rely extensively on oil for production purposes. Hence, this results in structural unemployment. In addition, firms will seek cheaper alternatives, such as renewable energy and natural gases, thus reducing the severity of structural unemployment.


This article is contributed by Mr. Keiran Tan, JC Economics Tutor of Economicsfocus, who has 5 years of teaching experience. Currently, Mr. Keiran Tan provides specialized Economics Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.

Economics Tuition – Explain why government tries to maintain price stability to maintain or enhance its level of investments

Economics Tuition – Explain why government tries to maintain price stability to maintain or enhance its level of investments.

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Firstly, a high level of inflation introduces business uncertainty and hence reduces investors’ incentive to invest. Specifically, hyperinflation disrupts the derivation of cost of production, making it difficult to set price which discourages trading activities and heightens the cost of investment. This contributes to lower investment rate in the country, which raises a cause of concern for government to maintain price stability.

In contrast, price stability via a mild level of inflation is desirable as it stimulates investment. Mild inflation raises production and national income when inflation rate is low as it induces growth of profitability. As production cost lags behind product prices, producers can pass on the rising cost condition to the consumers, enabling to gain greater revenue and profitability.

In addition, price stability, via modest price appreciation, will raise revenue under price-inelastic demand condition and when increase in total revenue is higher than the increase in cost of production, profitability will rise and entrepreneurs are more willing to invest because of their expectations of higher profit margins.


This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.

Economics Tuition – Explain why inflation exists in the housing market

Economics Tuition – Explain why inflation exists in the housing market.

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Given that housing is an asset to home-owners, the rise of the price of assets will cause the individuals to raise the price of their factor services as they peg their factor cost to the price of the housing prices. The price of assets will rise due to the inflow of hot money, which refers to short-term capital inflow by speculators in the housing money. Furthermore, the rise in price of assets will raise the value of mortgage and cost of payment, inducing a rise in rental cost. Consequently, there will be a cyclical increase in price of housing, with inflationary pressures. Hence, there is asset-based inflation.


This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.

Economics Tuition – How to explain cost-push inflation?

Economics Tuition – How to explain cost-push inflation?

Cost-push inflation occurs when there is a rise in cost of production which will lead a fall in the aggregate supply that will lead to an excess demand condition, contributing to increase in price level. When the cycle becomes cyclical, it will develop as wage-price spiral or price-wage spiral.

Economics Tuition - JC Economics Essays - Economicsfocus - Cost-push Inflation Diagram

Economics Tuition – JC Economics Essays – Economicsfocus – Cost-push Inflation Diagram

As seen from the diagram, the rise in cost of production will lead to a fall in aggregate supply from AS0 to AS1 which will create an excess demand condition at P0 which will prompt the rise in price from P0 to P1.


This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.

Economics Tuition – Explain the impact of a rise in oil price on inflation and unemployment

Economics Tuition – Explain the impact of a rise in oil price on inflation and unemployment.

When there is a rise in oil prices, the cost of production is increased which will lower aggregate supply, resulting in an excess demand condition, thus raising general price level. Hence, cost-push inflation arises.

An oil price hike leads to inflationary pressures. The increase in the price of raw materials and natural resources, such as crude oil, leads to an increase in manufacturing and transportation costs for many industries. Consequently, producers will pass on the increase in cost of production to consumers in the form of higher prices and inflationary pressures ensue, as illustrated by upward shift of the horizontal portion of the aggregate supply curve.

Oil price hike also leads to higher unemployment. For firms that are unable to pass on the increased cost of production to consumers will have to scale on their production process, including labour. A prolonged oil price hike will lead to the erosion of comparative advantage for firms in these industries which rely extensively on oil for production purposes. Hence, this results in structural unemployment. In addition, firms will seek cheaper alternatives, such as renewable energy and natural gases, thus reducing the severity of structural unemployment.


This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.

Protected: Economics Tuition – JC Economics Essays Online – Inflation and Unemployment – Q6b

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Protected: Economics Tuition – JC Economics Essays Online – Inflation and Unemployment – Q6a

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Economics Tuition – Why should governments keep inflation rate low?

Discuss why governments are concerned to keep up the rate of inflation at a low level. (13) (What are the advantages of low rate inflation?)

Introduction
Inflation is a situation where there is a sustained and inordinate increase in the general price level when there is excess demand without or with an inadequate increase in supply. As the occurrence of high rate of inflation may bring about adverse effects on the economy but a mild rate of inflation may be beneficial to the economy, it is natural for the government to seek maintain the rate of inflation at a low rate.

Main Body
One such benefit of low rate of inflation is the positive stimulation it has on the level of investment and employment. When price level increases at a low rate, it will mean an increase in the total revenue, provided that the demand for goods is; inelastic. This implies that profitability will increase and induce producers to produce more and hence, there will be an increase in investment and subsequently increase the level of employment.

Low rate inflation will also help to prevent extensive unequal distribution of income since a large proportion of the population is fixed income earners. Fixed income earners will not be marginalized by the effects of excessive inflation and thus erode their purchasing in favour of those who are receiving their income pegged to price movement

Low rate of inflation will also mean that the purchasing power of the people is maintained and this will also mean that their ability and willingness to save is maintained. Consequently, there will be a considerable level of saving, enabling the economy a constant source of fund for investment.

Low rate of inflation can also help to prevent excessive rise in cost of livings enabling the workers to maintain their purchasing power and standard of living. The trade union will less likely to ask for excessive wage increase, which help to stabilize our cost of production.

Without excessive price change, there will be lesser wastage of resources since speculative activities are minimized. Investors with source of fund will not direct their investment on goods with speculative appreciation but instead on goods with production activities that will enhance the economic development of the economy.

Externally, a low rate of inflation is also beneficial, as it will help the country maintain its international competitiveness as an exporter and as a country for foreign investment. Lower rate price increase will mean that the cost of production can be maintained at considerable level, easily counteract by a rise in productivity. It will also mean the cost of business operation is kept low and competitive.

Low rate of inflation will enable the nation to maintain its export price and hence ensure that export demand will grow. At the same time, import expenditure will not rise excessive since local goods are still reasonably low and attractive to the -consumers. This will mean that a deficit balance of trade will not surface.

Without high rate of inflation, there will be no need of a corresponding contractionary monetary policy to curb inflation. This means that increase interest rate will not rise creating the influx of hot money and instability to the foreign exchange market. This will lead to excessive speculation dampening the economic development to the economy.

Conclusion
In conclusion, the occurrence of high rate of inflation is not desirable and the government will seek to maintain the inflation at a low rate as it has certain beneficial effect of the economy.


This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.