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aws全区号( inflation good for the economy?



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IN any Economics 101 class, students are often made to understand that a modest level of inflation is good for the economy as a whole. A healthy level of inflation contributes to production increase as more money translates to more spending, which directly influences aggregate demand.CLICK TO ENLARGE

This stems from the ideology of renowned British economist John Maynard Keynes, the father of the Keynesian economics model, which is premised on the “level of investment in the economy must exceed its savings rate in order to promote economic growth.”

Keynes believed that it is aggregate demand that drives production and not supply. To boost aggregate demand in the economy, the government should spend and invest heavily.

Even if the government needs to take on debts, for the sake of the economic health, it is the most direct means to accomplish its goal.

Keynes’ ideology was shaped by the 1929 Great Depression where he realised the only way to get out of a recession is through increased expenditure within the economy.

If the economy is in a recession and everybody cuts back on spending including the government, then it creates a vicious cycle which further deepens the recession.

Reduced demand will lead to lesser production and in turn unemployment. The “Paradox of Thrift” by Keynes categorically states that net savings are bad for the economy. In the bigger scheme of things, where does inflation come into the picture?

To make it less theoretical and fun, let’s talk about the Big Mac index. The Big Mac index first appeared in 1986 in The Economist publication, which measured purchasing power parity (PPP).

Due to the massive expansion of McDonald’s globally, Big Mac, the popular beef hamburger which is a common feature on the menu in most countries, became a benchmark to measure PPP and forex value between various countries.

Pam Woodall who created this illustration with a touch of humour gave rise to “Burgernomics” which remains relevant today. For illustration purposes, let’s compare an ala carte Big Mac in Singapore which cost S$6.40 (RM19.84) versus Malaysia’s RM11.60. The implied PPP is 1.767.

This essentially means that Singapore’s purchasing power is stronger than that of Malaysia by that ratio. Also if we measure against the current forex rate of 1 Singapore Dollar to 3.1 Ringgit, it would imply that Ringgit is undervalued to Singapore Dollar by 75%. As at 21st July 2021, Malaysia was ranked 50 out of 56 on the Big Mac index and against the US Dollar, deemed to be 58% undervalued.

PPP is a metric to compare economic productivity and standards of living between countries. The basis is the “law of one price”. While it works as a useful gauge in theory, economic forces in real life would thwart the accuracy such as different tax regimes and inflationary pressure. There were subsequently many variants to the original Big Mac index such as the “Tall Latte” index which relied on Starbucks’ franchises around the world for comparison.


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