Macroeconomic the Contemporaneous Societies Reveal

Macroeconomic

The contemporaneous societies reveal an impending need for comparability and, in terms of economics, one such measure is offered by the inflation rates. This paper is organized onto four sections. The first and last parts introduce, respectively round up, the analysis, whereas the second and third sections deal with the inflation rate and the expansionary gap.

The contemporaneous societies reveal a growing need for uniformity. This necessity is driven by a desire to compare national features across various countries and is supported by the growing forces of globalization. A highly relevant tool used to compare economic features is the inflation rate.

Inflation Rate

In a most simplistic formulation, inflation can be understood as the change in consumer price indexes. Its expression over a specific time period, generally one year, is revealed in the form of the inflation rate. Lawrence H. White (2008) at the Library of Economics and Liberty explains: "Economists use the term "inflation" to denote an ongoing rise in the general level of prices quoted in units of money. The magnitude of inflation -- the inflation rate -- is usually reported as the annualized percentage growth of some broad index of money prices."

The inflation rate is determined within the market and is pegged to a complex system of numerous components, such as consumer demands, currency exchange rate modifications or natural conditions (hazards such as droughts or floods impact the crops and as such the offer for agricultural products). Given this complex system, it then becomes obvious that man can do little to control the inflation rate or determine its desired value. Yet, sustained efforts are being made at national level to better control inflation.

3. Efforts to Reducing the Inflation rate

In Australia, the Reserve Bank of Australia is in charge of setting a targeted inflation rate. This targeted value may often be higher than the actually registered value. If the difference between the targeted and the real value is small, it could mean that it is insignificant and the actual economic impact is limited. In this case scenario, the BRA could place a growing focus on achieving the targeted value. This could be done through a thorough analysis of the elements which prevented the inflation rate from achieving its targeted value and their correction -- meaning the focus on the real improvement of the features which led to a lower value of the inflation rate; this will be achieved within the imposed limitations.

If on the other hand, the real value of the inflation rate is significantly higher than the targeted value, problems arise in that the purchasing power of the consumer is suffering demises. A first measure the RBA could implement is that of comparing the real inflation rate to the targeted inflation rate as well as the past rates. As mentioned in the introductory section, the ability for uniformity and comparability is impending within today's economic systems. Assuming that the needs for comparability are met and that the current inflation rate is above the targeted value, it is necessary for the RBA to look at the past values of the inflation rate. At the end of this endeavor, they will observe whether the inflation rates have followed an ascendant or descendant trend.

If the current inflation is above the targeted value but below the values of the past recent years, revealing as such a descendant trend, it is probable for the central bank to continue with the implementation of its current monetary plan. If on the other hand, the real inflation rate is above both targeted and past values, the RBA could change its current approach and implement more aggressive means of decreasing inflation, such as reducing the amount of money in circulation or increasing the interest rates. A higher interest rate will reduce the amount of money in circulation by making the goods and services less accessible to the public. This in turn will materialize in a reduced demand for currency, reducing as such the levels of inflation.

3. Reducing the Expansionary Gap

An expansionary gap, often known as an inflationary gap, generally occurs at changing stages of the business cycle and is generally pegged to high levels of inflation. It can best be understood in terms of production and input in the meaning that it occurs when the final output of production is larger that the output of the labor force. "An inflationary gap exists when equilibrium income is greater than full employment income. In such a case, businessmen would compete against one another to get resources with which to produce the output that is demanded, and costs would rise, with prices following them up" (King).

Similar to the reduction of the inflation rate, the Reserve Bank of Australia will most likely employ a strategy of contraction in order to reduce the expansionary gap. Some measures in this direction include:

Reducing the purchases made by governments in order to reduce demand for certain products or services -- this will have the sought out benefit of reducing the amount of money in circulation, but will also have the disadvantage of limiting the development of the respective industries or sectors

Increases in taxes -- similar to the previous method, the increase in taxes will absorb more money from the economy and will as such reduce inflation; it will however also reduce the purchasing power of the population and will create social dissatisfactions