Inflation

You cant whip inflation, but you can reduce its impacts.

members
Ta Hoang Son Ngo anh Van Nguyen i Minh Hanh Tong Minh Phuong Le Linh Chi Vu uy Linh
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WhatIsInflation?

An upward movement in the average level of prices

ThemeaningofInflation

Institutional Fund
U.S Money supply (trillion dollar) 15 11.25 7.5 3.75 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Inflation&MoneySupply
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WhatcausesInflation?
e supply of money goes up e supply of other goods goes down Demand for money goes down Demand for other goods goes up

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Thecostsof Inflation

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Shoe-leatherCosts
Ination encourages people to reduce their money holdings. Shoe-leather costs are the wasted resources incurred.

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menucosts
Needed to update your price lists Menu costs are the costs of adjusting prices.

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RelativePriceEffects
Ination distorts relative prices. Consumer decisions are distorted, and markets are less able to allocate resources to their best use.

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Inflation-InducedTax Distortion
e income tax system treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for ination. e aer-tax real interest rate falls, making saving less attractive.
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Confusionand Inconvenience
Money: dierent time, dierent value More dicult to compare real revenue, costs and prots over time

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ArbitraryRedistributions ofWealth
Many loans in the economy are specied in terms of the unit of account: money. Unexpected ination redistributes wealth among the population.

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inflation inVietnam

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Source: economywatch.com
Ination GDP Growth
90 67.5 45 22.5 0 -22.5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

graphofinflationandGDPgrowthinVietnam
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Reasonsfor highinflationin2008

External Factors Internal Factors

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externalfactors
Unfavorable supply shocks
Oil: peak-147.27 USD/barrel in 2008 higher cost of production SRAS shis to the le. Food: increasing worries in food crises due to natural disasters or war

Growing trend-loose monetary and scal policy in other nations

Money supply in emerging nations on average has been fuelled by 20% in 2008

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internalfactors
Trade decit and balance of payments Enormous capital inows into Vietnam High prospect of growth High expected ination rate

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Tradedeficitandbalance ofpayments

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Tradedeficitandbalance ofpayments

Import Surplus: Exports < Imports

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Capitalsinflowsin vietnam
Oshore capital inows in 2007: 14,6 billion USD-25% GDP
(FDI, ODA, remittances)

Capital inows management policy

Bump domestic money to buy foreign currency 112,000 billion VND for 7 billion USD, 2007 (money supply increases Ination)

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Highprospectof growth
Prolong expansionary monetary policy Most particular in the growth of money supply
VN: 17% rise in GDP-73% rise in Money supply China: 22% rise in GDP-36% rise in Money supply VN has a higher ination rate

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Highexpectedinflationrate

Lack of commitment by government to battle ination E.g: spiraling cost in basic commodityoil, coal and electricity

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curbinginflation

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ToolstoCurbinflation
e Government would further tighten monetary policy. e Government should cut expenses and public investment relying on the State Budget Development of agriculture and industry Supply and demand of goods must be ensured to promote exports and reduce the trade decit

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ToolstoCurbinflation
ri in production and consumption was encouraged. Market management should be further supervised to avoid price speculation, (especially essential items) To help people, especially the poor, survive the price severe rises, the Government will implement social welfare policies and increase salary and allowances.

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Theinfluenceof inflationcontrolling measures

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Tradeoffbetweeninflation andunemployment

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USideaaboutcostof reducinginflation
THE SACRIFICE RATIO: slow the rate at which the money supply is growing -> contracts the aggregated demand ->reduces the quantity of good and services that rm produce -> the fall in employment. In short run, the lower ination and the higher unemployment In long run, the ination is lower and the unemployment is back at its natural rate.
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USideaaboutcostof reducinginflation
e sacrice ratio is the number of percentage points of annual output lost in the process of reducing ination by one percentage A typical estimate of sacrice ratio is 5

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ToolstocurbInflation
Fiscal and monetary policy (interest rate) Investment Fixed exchanged rate Balance of trade Wage and price controls

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Forecastinflation inVietnamin2010

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target

Government set the target to dominate the ination rate below 7%

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trend
Increase: Petro price by 600VND ( Feb 21) Electric price by 6.8% (Mar 01) Minimum wage 650k to 750k Ination Rate > 7%

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conclusions
Decision between Growth and Ination

GDP Growth

Ination

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thankyoufor yourattention

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