According to Oxford Economics dictionary income distribution is “The division of total income between different recipients. *Functional income distribution is the division of income between the owners of the different factors of production. *Personal income distribution is the distribution of income classified by size. Income distribution can be measured before and after the deduction of direct taxes and the addition of transfers.” (pg 216)
Income distribution just represents, how the income is distributed amongst the people in an economy. Some countries face a huge problem of income inequality and income inequality is “Income inequality describes the extent to which income is distributed unevenly among residents of an area. High levels of inequality indicate that a small number of people receive most of the total income, and that most
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Inflation in Latvia: Causes, Consequences and the Governmental Response
Inflation is defined as a persistent increase in the average price level in the economy, usually measured through the calculation of a consumer price index.
Causes of inflation in Latvia
• Exchange rate Developments: “Latvia has a fixed exchange rate, with the currency pegged to the Euro, and the government does not want this to change. If this nominal rate of exchange stays fixed (at one Euro for 0.7 Lats), then the only way to lower the value of the currency internationally is to do so in “real terms.” This means pushing wages and prices down.”
• “Changes in administrative prices and widespread expectations of higher prices due to EU accession or an unfavorable exchange rate developments. (Lat is pegged to the Euro). Result: overheating in the labor market
• Rise in production costs, which leads to an increase in the price of the final
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Pros and cons of the Government involvement in the banking sector: Case of the Parex Bank
A very important matter to understand is when the nationalization* of Parex Bank happened. It happened at the beginning of an economic recession* when many businesses and individuals started taking money out of Parex bank with the fear that the bank might bankrupt. With this fright of bankrupt, more than 60 million Lats were taken out of Parex within a week by Latvians who has money saved in Parex.
Pros: Without the nationalization of Parex Bank, Parex Bank would have surely bankrupted. Because of the government taking control of 51% of the bank and investing large sums of money into the bank, it was able to continue working and not bankrupt. If the government would have decided not to do anything about Parex and simply let Parex deal with its own problems, then soon they would have realized that Parex problems have turned into their o
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As always, let's start with the pros of the government bailing out (nationalizing*) Parex bank, and just in general, bailing out businesses.
First, this is the only way that the bank can be kept alive. Since this was the largest nationally owned bank (one that is not a nordic immigrant bank), it would wreck the already weak Latvian economy, leaving irreversible effects on the Latvian, as well as possibly neighboring countries’ economies. This can be confirmed by a Moody’s report, saying that, "Latvia and Hungary were stabilizing but that their economies remained fragile. The problem is high debt levels, which is restraining consumer spending.” This means that if the Latvian government hadn’t bailed out the bank, and returned some money into circulation to cover debts, it would probably have left the Latvian economy in something far worse than the already present crisis, with the PPF* decreasing even more than it already had decreased.
Another positive thing about bailing out Pa
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Megan Phipps 10/09/10 Mr.Polis Inflation in Latvia: Causes, consequences, and the Government Response. Inflation is defined as the increase in the amount of money and credit in relation to the supply of goods and services. It is a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency. Basically, everything becomes more valuable except money. Latvian Inflation: The cause for Latvia’s high inflation is mainly dependent on the currency rates. The Euro has become more valuable, leaving the Lat to decrease in value. Also, the growth rates are high in the Baltics leading to high inflation. Unfortunately because the inflation is so high it has prevented the growth to stay high. Latvia is a transition country because it such a young independent country and a big part of the inflation is related to the affects of this transition and their privatization policy that was intr
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Inflation in Latvia: Causes, Consequences and the Government response.
Latvia joined EU in 2004.
Causes for inflation:
I specifically mentioned joining EU in previous paragraph, because as you might notice it from the graphs (image 1 and image 2), inflation increase drastically since we joined the EU. (Countries may not join EU if they have a higher than about 1.5% inflation, because its always expected to have a greater increase in inflation once you join EU.) However this obviously wasn't the only reason for inflation. My previous point is supported by another economist: "These increases are well explained by e.g. exchange rate developments (appreciation of the euro, thus depreciation of the lat, thus higher import prices), changes in administrative prices and, for the latter, widespread expectations of higher prices due to EU accession (see e.g. Benkovskis and Paula (2007) for a comprehensive survey) which seemingly made it easy for firms to charge higher prices.
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The causes of inflation in Latvia mainly are: 1. The increase in amount of money (increasing new business man actions, increases the money in Latvian economy) 2. By increasing the amount of money also increases the prices of products 3. Prices depends on supply and demand in world market no only Latvian (In Latvia demand was huge but supply couldn’t handle demand so suppliers had to increase there product prices 4. Some years ago Latvian products were much cheaper the in rest of Europe, so when 5. Creditors are increasing and credits as well
Government responses: ‘’ The government anti inflation plan18 has five broad sets of measures. Three measures – budget policy, real estate taxation and measures to dampen the credit boom – are described as providing "for short-term and medium-term policy implementation”. The other measures aimed at the labor market, productivity, energy efficiency and increased competition are "planned to bear fruits in a medium to
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Inflation in Latvia: It’s Causes, Consequences and Government reaction.
Inflation is defined as a persistent increase in the average price level in the economy. Governments desire a low inflation rate, which cannot always be assured. There is the so called demand-pull inflation, which occurs as a result of increasing aggregate demand, which can be due to high consumer’s confidence and demand for a country’s exports or an increase in government spending. This can occur in different situations; either when the economy is approaching full employment or when the economy is at full employment and output cannot be increased anymore, thus inflation increases when the aggregate demand curve shifts to the right. There is also the cost-push inflation, which occurs as a result of an increase in the costs of production; raw materials become more expensive, workers want higher wages, etc. Short run aggregate supply will fall, the average price level will increase and real output will fall. ... Read more »
Latvia’s Inflation: The high inflation in Latvia was caused by a few different actions or events that took place. "These increases are well explained by e.g. exchange rate developments (appreciation of the euro, thus depreciation of the lat, thus higher import prices), changes in administrative prices and, for the latter, widespread expectations of higher prices due to EU accession (see e.g. Benkovskis and Paula (2007) for a comprehensive survey) which seemingly made it easy for firms to charge higher prices.” ( Vanags & Hansen, 5 ) „It is the result of overheating in the labor market as well as of higher inflation expectations. Latvia today is a country with substantial inflation and people know this and factor it in to wage demands, which in turn add to the production costs of firms and end up in higher prices.” ( Vanags & Hansen, 5 ) This then creates that inflation spiral where the employee knows that there is inflation and because of this, he asks for an increase in s
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