economics help needed

[zxcvbnm]

in inflation, one of the probelms is that borrowers tend to gain and lenders lose, unless loans are index linked...i dont get it...can someone please explain asap?

[zxcvbnm]

also, how does a fixed exchange rate system prevent imported inflation?

[ahaseebmirza]

For your 1st Question:
When there is inflation, RPI rises and Real Value of money falls that is now the same amount of money will buy less amount of goods. So now the Amount the borrower will repay will remain the same but it has less value compared in real terms so he will be paying less comparitively and the lender will loose because the money he recieves is now of less value..For example A lended 10,000 to B...Suppose that this amount can be used to buy a car...And now there is inflation of 10%..Now the amount B will repay will be actually worth 9000...Just an example to explain..I know its too imaginery 

For your 2nd Question:
If the Exchange rate is not fixed, When import rised comparitively to exports, There will be disequlibirium in the balance of payments account and a deficit because imports are more than exports so automatically the exchange rate will fall to fill up this deficit but as this falls now it will be more expenisve to purchase the imports..Suppose exchange rate was $1=SR 3 and Saudia is importing more so exchange rate depriciates to $1=SR 3.5  SO now more riyals have to be paid to get the same imports so price of import rises which raises the cost of raw materials or finsihed goods imported and thus inflation rises...On the other hand if exchange rates were fixed, it would not depreciate and the imports would not get expensive..

HOPE I was able to make myself clear   

[zxcvbnm]

thankyou!

[icyblind]

How can you relate terms of trade with PED?

[ahaseebmirza]

Firstly Define both:....PED is the measure of elasticity concept that is (%Change in Demand/%Change In price) *100
Terms Of trade is (Export Prices/Import Prices)*100 which will give and index figure for terms of trade..
Now coming on the question If The good is Price Elastic i.e Elasticity>1, then if the prices rise then the quantity demanded will fall by a greater amount so as the terms of trade improves due to rise in export prices the current account deficity will simultaniously worsen because the net revenue will fall....THE MARSHALL LERNER COndition....However if the good is inelastic, then the current account deficit will reduce or even enter into surplus the J-CURVE Effect....

These both Curves relate terms of trade and the Elasticities concpet...

[icyblind]

Thanks, ill learn the marshall condition as well

[Coco]

Hey can anyone let me know...How can a current account surplus be brought back to obtain a balance of payments?

[holtadit]

Hey can anyone let me know...How can a current account surplus be brought back to obtain a balance of payments?

I take IGCSE economics, so this might be an elementary level response :

A surplus is caused by exports exceeding imports, right ? So I would think of ways to bring exports under control.

[Lovee]

For your 2nd Question:
If the Exchange rate is not fixed, When import rised comparitively to exports, There will be disequlibirium in the balance of payments account and a deficit because imports are more than exports so automatically the exchange rate will fall to fill up this deficit but as this falls now it will be more expenisve to purchase the imports..Suppose exchange rate was $1=SR 3 and Saudia is importing more so exchange rate depriciates to $1=SR 3.5  SO now more riyals have to be paid to get the same imports so price of import rises which raises the cost of raw materials or finsihed goods imported and thus inflation rises...On the other hand if exchange rates were fixed, it would not depreciate and the imports would not get expensive..

I disagree. This only applies on one condition. "When import rised comparitively to exports", that would start off the chain of events.

If this doesnt happen, fixed exchange rate systems actually invites imported inflation:

Before:
RM 1 : USD 1

Since USD has inflation,

RM x : USD 2,

and since the rate is fixed at RM 1: USD 1, x = RM 2

Thus the good has become more expensive in Malaysia.

On the other hand, free e/r actually prevents imported inflation. Because of Gustav Castell's purchasing power parity theory, E/R goes down because of inflation in the USD. This appreciation of the RM thus lowers the price of imports automatically.

Hope this explained some stuff

[ahaseebmirza]

I disagree. This only applies on one condition. "When import rised comparitively to exports", that would start off the chain of events.

If this doesnt happen, fixed exchange rate systems actually invites imported inflation:

I totally Agree with u but his question did not mentioned inflation so thought would be confusing but thanks for the reply...These discussions clear the concepts..

[Naina107]

Can someone help me with what is the J curve effect actually?

[Coco]

Thanks...
Also could anyone please let me know the diffrence between a fiscal drag and a fiscal boost?

[cashem'up]

Thanks...
Also could anyone please let me know the diffrence between a fiscal drag and a fiscal boost?

Fiscal drag refers to the process where tax thresholds are either not adjusted for inflation, or fail to
keep pace with earnings growth, causing in either case an automatic rise in tax revenues.

Example of nominal fiscal drag
Suppose a person earns $20,000 per year and is liable to 20% tax on earnings above a threshold of
$5,000 per year. Then they pay (20000-5000)*0.2 = $3000 in tax, or 15% of income. Now suppose
that due to inflation, their wage goes up by 5%, but the government only increases the tax threshold
by 2%. They must now pay (21000-5100)*0.2 = $3180 or 15.14%. The proportion of income as tax
has increased - this is fiscal drag.

Fiscal Boost - inflation will reduce the real burden of specific taxes
(I.e. taxes levied per unit of a commodity
irrespective of its price) such as excise duty.

this is up in my notes.....
hope it helped