The effect of inflation on businesses (1 Viewer)

[Study_like_a_nerd]

In the long run, high inflation will result in a depreciation. How would this depreciation impact businesses? Thx

 

[Ekman]

Is this in terms of domestic or global inflation, because the two will have different impacts.

 

[Study_like_a_nerd]

Basically the impact of inflation on businesses in a domestic economy --> I was trying to formulate an argument linking the effects of inflation leading to depreciation in the long term in a domestic economy and thus impacting businesses

 

[Ekman]

Basically the impact of inflation on businesses in a domestic economy --> I was trying to formulate an argument linking the effects of inflation leading to depreciation in the long term in a domestic economy and thus impacting businesses

Yeah looking into something in the long-run tends to lead in never ending cycles, for example a short-run appreciation will cause a long-run depreciation which will cause another even longer-run appreciation. So in terms of how domestic inflation will impact the businesses and the exchange in both the short to long run, it will cause an appreciation in the short-run (time lags - results in higher prices of exports and an improved TOT) so in the short-run it will cause further economic growth (assuming that the inflation was initially caused be demand-pull inflation). In terms of how this impacts businesses, they gain more profits and quite possibly hire more employees (a little abstract but something to consider). However in the long-run, consumers both on a domestic and international level, will realise the higher prices and divert their purchases away from businesses with inflated prices. Hence the reduced demand for exports, as well as the increased demand for imports would cause the depreciation. So as this is going on, the domestic businesses will be suffering as they wont be selling as much, and most likely macro policies will get involved to control inflation. Then a little further down the track, as inflation is stabilised, the businesses will take advantage of the depreciation and the purchasing power of consumers will decrease, and trade will be diverted back to domestic businesses. This should explain the cycle, as demand-pull inflation will be caused again and the cycle will repeat.

 

[Study_like_a_nerd]

Yes yes I see thx