Inflation and the Future of China

Inflation and the Future of China

Abstract:

The main aim of this study is to define the most important economic factor which is the inflation and its affection to China. As we all know that business needs to be run in equilibrium in order to deliver the balance between supply and demand which is the central point to drive the economic growth. This research will dig into inflation and find out how inflation has affected economics of a country, in particular China and the ways to stabilize this condition. The topics will also be looked into detail to identify the real causes of China inflation and the damages it has been generated .The question is that China inflation continually going up may or may not lead the country to hyperinflation in the future.

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Introduction:

Hyperinflation can be defined as s situation where the prices of goods and services escalate beyond control that cause the currency devalued sharply. How do we measure the hyperinflation? It can be concluded if the general inflation being over 100% in three consecutive years .in general, if a country running into the hyperinflation, the real value of local currency will experience rapid erosion and people tend to reserve other foreign currencies which relatively stable compare to local currency.

Hyperinflation makes the prices of goods and services in a country increase rapidly due to the devaluation the local currency. For instance, Venezuela and Zimbabwe. If we exam these two countries before we look into what is happening in China, we can see that Zimbabwe inflation was only 18.7% which is very close to current China inflation ,but the present Zimbabwe inflation has been rise to 231000000%;Venezuela present inflation has been rise to 1000000% compare to its inflation 18.3%in 2012. Although, those countries has been in civic war and other negative impacts ,but its fiscal and monetary policies also play a very important role to lead them where they are now. On the other hand, China has been significantly rise M2 and inflation has been raised accordingly, even though China is not single natural resource backed and nether being through any war, it still possible to run into the hyperinflation unexpectedly.

Literature review:

In this paper I will propose a test of the hyperinflation model of money demand through Cagan(1956) analysis about European hyperinflation and Milton’s view of hyperinflation in quantity of currency supply. Both Cagan and Milton argued that hyperinflation can be identified through the relationship between money supply and price increase. It is very clear that the cost and services raised while the money supply increased. Cagan even further assessed the statistical connection between cash and price level changes cross six different European countries, then concluded the inflation played a very important role to hyperinflation determination.

If the theory is correct and the history can be seen as a mirror to the future, then China inflation can lead the country to the hyperinflation or not should be the question to discuss.

In addition, we also going to analysis what happened in Zimbabwe inflation and why China inflation is different from Zimbabwe, but what can be learned from Zimbabwe hyperinflation.

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Methodology:

This proposal will seek to analysis China monetary and fiscal policies in order to clarify the mechanisms through money and price setting behavior. To archive this goal, the proposal needs to check various models and run different tests that will lead to better understanding whether China will run into hyperinflation in the future.

Definition of hyperinflation and what it may cause:

Utilize the research of hyperinflation history along with….Show More….

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