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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Inflation in latvia. It's Causes,
Consequences and Government reaction.
First, on must define inflation.
According to the Oxford Dictionary of Economics it is defined as:
A persistent tendency for prices and
money wages to increase. Inflation is measured by the proportional
changes over time in some appropriate price index, commonly a
consumer price index or a GDP deflator...
Inflation in latvia:
Causes:
One could argue that the latest rapid
increase in inflation was due to Eu accession or on unfavourable
exchange rate as the law is now pegged to the euro, rather it is as
states in an inflation report which was issues may of 2006 which
stated that:: "...
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Inflation in Latvia: Causes, Consequences and Government Response
Inflation is a phenomenon defined as a persistent rise in prices. There are two major reasons that inflation increases, demand-pull and cost-push. Demand-pull is when the supply of products is low and the increase in demand shifts the aggregate demand curve to the right, thereby raising prices. Cost-push is when the costs of production increase and producers pass these costs onto consumers by raising prices. This causes the short run aggregate supply curve to shift to the left. There are many consequences to high inflation. One of these consequences, according to the Phillip’s Curve, is low unemployment. The theory is that as prices rise and producers make high profits, the demand for workers increases as producers require them to keep up their current levels of output. Another consequence of high inflation is that exports become less competitive, because their prices are so much higher than other countries’ e
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