Readers Question: If inflation is too much money, too few goods then how come…..Zimbabwe has the world’s highest inflation rate, at more than 100,000%, and just one adult in five is believed to have a regular job? With no job, no money so no demand so…why inflation?
I don’t have much information on the Zimbabwe economy but a likely explanation for the situation in Zimbabwe could be the government printing money and thereby increasing the money supply much faster than Real GDP.
A few years ago, national debt in Zimbabwe increased to over 100% of GDP. To finance the National Debt, the Government started printing money; but, this only devalued the value of existing money and caused prices to rise.
The inflation is also exacerbated by a shortage of supply. Because basic goods are in short supply it is easy for market prices to be increased causing a spiral effect of upwardly rising prices.
Ironically, this shortage of supply has been made worse by the imposition of price controls. These fix prices for basic goods. But, because the cost of production has been increasing faster than prices, suppliers have little incentive to supply (at least to official channels). This makes the shortage worse and therefore the likelyhood of inflation stronger.
- Note: I think that there is ‘weak demand’ rather than ‘no demand’ Some people still have the ability to buy goods; the problem is that the supply of goods is still less than the very ‘weak’ demand.
- Also, the thing here is that there is little ‘effective demand’. i.e. people want to purchase goods, they just don’t have the necessary income to be able to do it. Leading to tragic consequences such as Funeral Costs soar
Causes of Inflation MV=PY
The Monetarist explanation of inflation is that prices are linked to growth in the Money Supply. The quantity theory of Money states MV=PY. If we assume a constant V (velocity of circulation) and Constant Y, an increase in the Money supply leads to an increase in prices. In practise, the link between the money supply and inflation is not as simplistic as this formula states; but, as a rough rule of thumb if the money supply increases by 1000% and Real GDP stays the same you can expect inflation of around 1000%
Mugabe’s Explanation of Inflation
I believe Mugabe once blamed inflation on ‘Greedy businesses’ demanding price rises. This encouraged him to set up price controls. But, as mentioned these have been ineffective in preventing inflation.
Other Mugabe supporters have tried to blame the inflation as a ‘Western Import’. Although this assertion is rather bizarre given that inflation is relatively low in Western economies.
13 comments ↓
One cause is corruption:
http://www.newzimbabwe.com/pages/inflation181.17413.html
Also:
“The IMF has said however that the principal causes of inflation, chiefly reckless state spending, arbitrary government controls and the flight of foreign investment remain unchanged”
http://www.newzimbabwe.com/pages/inflation13.11637.html
Printing money
http://en.wikipedia.org/wiki/Hyperinflation#Zimbabwe.2C_2000s
Government spending
http://www.zimbabwesituation.com/jul31a_2003.html#link16
[...] the case of Zimbabwe, inflation has reached 100,000%. Therefore the Nominal value of output is rising very fast because the prices [...]
I do not understand the responses. If prices are rising by 1000% and unemployment is 80% then WHO is buying the goods? It cannot be the people unemployed as they would not have the money. If the answer is ‘no-one is buying the goods, hence starvation’ then why would prices be so high as if there’s no demand….
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Hmm, looks like something that will happen to the U.S. pretty soon….
inflation in zimbabwe will continue to rise if the government remains broke. Mugabe’s government has created the situation in the first place. Lets look at this!! Farm invasions=no agro raw materials needed buy Food industry e.g OLIvine, National foods, Dairyboard. It also result in no quality tobacco, cotton and flowers for export=foreign currency, for government imports e.g fuel (OIL) and foreign currency needed by companies to import spare parts and other raw materials e.g BAT tobacco import paper for making cigarrates. Biggest effect was governemnt failing to meet foreign debt repayments. Gono & Bob option print more money sell to black market (Diaspora)=excessive money supply=hyperinflation effect. All this resultedin collapse of formal business sector, production low to zero=Few goods and high demand survival of the ones with Diaspora connections=perpetual increase of prices of scarce goods. All of us know what needs to be done to correct this I dont have to waste my time say it. Even Bob knows. lafaelihle
plse. mugabe leave power and let the zinbabweans enjoy their belove country.
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In response to Tom French, it does not take much demand to create hyperinflation. All it really takes is too many dollars chasing too few goods. The inflation itself makes those who have goods and services charge even more for them in anticipation of the price increasing even further. The twenty-percent who have jobs in Zimbabwe will be trading their dollars as quickly as they can for whatever they can get that holds value or even gives immediate satisfaction. Because it is crazy to save, they will spend money as soon as they can get. Because there is little or no profit to selling goods and services, more and more people with-hold them from the market (or resort to barter), creating even fewer goods. The fact that 80 percent of the population cannot even participate in this inflation does not keep it from happening. In fact, it exacerbates the problem because it only reinforces the belief that anyone would be a fool to ship goods in to sell.
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