Essay Plans

Outline the main causes of inflation.

POINTS:

  1. Define inflation and quote current figures.

  2. Three theories

    • cost push/demand pull
    • monetarist
    • eclectic

  3. Cost-push

    • Trade unions push up wages independent of the stage of demand of the labour market
    • If demand is inelastic - import-led inflation

  4. Monetarist

    • Inflation is a continuous fall in the price of money thus if the supply of money is rising faster than the demand then the price of money falls (the price of goods rises)

  5. Eclectic

    • Determinants vary over time for any one economy and any one country. Other factors apart from above include: social conflict, dissatisfaction with present income and/or income distribution.

    Supplementary facts to cost push would include:

    • Monopolistic/oligopolistic institutions will add to cost-push inflationary pressure
    • Role of National Insurance
    • Leapfrogging of trade unions - the pay league
    • Wage drift

  6. Demand-pull

    • Diagram - inflationary gap.
    • ie if demand for goods (labour is derived demand) is greater than supply - demand pull. This could be locally if labour is immobile. (English tutors in Oxford earn £9/hour. Accounts tutors earn £10 upwards yet the English tutors have 1st class degrees).

This essay therefore has several essentials:

Another key element is the role of expectations (wage-price spiral). These affect the price of houses, long term contracts. Mention the MTFS (Medium Term Financial Strategy). Also inefficient consumption leads to inflation - we use heat in houses rather than insulate. With insulation demand for heating falls thus price does also.

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