Inflation and Its Impacts on Vietnam

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Inflation - a global phenomenon is becoming a burning issue in many countries all over the world today. The Oxford® Dictionary of Business presents the following definition for inflation: “A general increase in prices in an economy and consequent fall in the purchasing value of money.” In Germany in January 1921, a daily newspaper cost 0.30 marks. Less than two years later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the economy rose by similar amounts. This occurrence is one of history’s most spectacular examples of inflation, an increase in the overall level of prices in the economy (Principles of Economics, N.Gregory Mankiw, Chapter 1, p.13). When prices go up, the cost of money decreases and your purchasing power consequently goes down. For example, with 3% inflation, the price of a $100 T-shirt today would be 103$ next year. In short-term, inflation may seem not worth mentioning; however, in long-term it will lower the standard of living. According to the example above, with just 3% inflation annually, in 20 years you will need a whole of $180 to buy the same T-shirt. That means over that time, if your income cannot follow the price, you may be at risk of financial problem. Currently, inflation is also a big trouble in Vietnam as well as Asia countries. Vietnam’s government estimated that the inflation rate in April rose to 21.42 percent, the sixth consecutive month of significantly increasing and among the highest rate in Asia (Vietnam’s inflation hits 21.4 percent in April, Thanh Nien Daily News, April 26, 2008). Such hazardous situation has drawn great attention of authorities and general public on account of its severe impact on the economy in general and on people’s life in particular. This paper, with the purpose of giving the background knowledge of inflation, discusses the questions of what causes the high inflation, how inflation affects our economy and social life and what are the solutions as well as suggestions to solve this serious problem. 2.Discussion of findings

2.1. The causes of the high inflation
Unfortunately, there is no generally conventional cause of inflation; however, there are two explanations economists offer: demand-pull inflation and cost-pull inflation (Foundations of Economics 2nd Edition, Michael Parkin and Robin Bade, 2006). “Demand-pull” inflation can be described as too much money followed by too few goods. The idea here is that there are times when people have the means and desire to buy more goods and services than the economy can create. They are willing to buy commodities and purchase services and hence, they are ready to spend more money on their need. Because demand is high and supply is limited, prices are bid up, resulting in higher inflation. The three most likely causes of an increase in aggregate demand will also tend to increase inflation: increases in the money supply, increases in government purchases and increases in the price level in the rest of the world (Cost-push inflation vs. Demand-pull inflation, Mike Moffat, economics). The second cause is called “cost-push” inflation. Demands are escalating so quickly that vendors are incapable to meet such a high demand rate. To overcome this, they need to raise their number of workers, number of machines, etc. Therefore, they must increase their prices of goods to maintain their profit. Again the value of material goes up and the value of currency goes down. The two main sources of decrease in aggregate supply are: an increase in wage rates and an increase in the prices of raw materials (Cost-push inflation vs. Demand-pull inflation, Mike Moffat, economics). To base on two theories above, the cause of Vietnam’s inflation can be interpreted as “demand-pull” inflation. Dr. Thai Van Can, a consultant at the World Bank and IMF analyzes Vietnam’s contemporary macroeconomic (What caused Vietnam’s 15% inflation, Thanh Nien Daily News, March 18,...
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