Chapter 31: Inflation and deflation
f Analyse the relationship between a country’s GDP and import expenditure. (4) g Discuss whether or not an increase in the rate of income tax will reduce a budget deficit. (6) h Discuss whether or not all households suffer from inflation. (6)
Source material: The government of Bangladesh tackles inflation
Bangladesh’s inflation rate fell from 6.4% in 2015 to 5.9% in 2016. The government of the country of 156m people had set an inflation rate target of 6.2%, an economic growth rate target of 7.2% and a money supply growth rate of 15.5%. Although there were pay rises for public sector workers, food prices rose more slowly largely due to good harvests. The weight given to food and non-alcoholic drinks varies from country to country as shown in the table.
Country
Weight given to food and non-alcoholic drinks (%)
GDP per head ($)
Bangladesh
56.0
3700
India
46.0
6300
South Africa
18.2
13400
Turkey
23.7
20700
UK
10.3
42000
USA
8.4
56800
The weight given to food and non-alcoholic drinks and GDP per head in selected countries in 2015
As well as falling inflation, Bangladesh experienced a falling unemployment rate in 2016. Youth unemployment nevertheless remained high and there was considerable underemployment. This was despite a high rate of job vacancies. Employers said they could not fill these because the job applicants lacked the appropriate skills.
To stimulate investment, the government cut the rate of corporation tax. The central bank of Bangladesh decided that it would keep the rate of interest stable, but some economists suggested that it too needed to be cut to stimulate investment.
Changes in the rate of interest also influence a country’s household savings ratio. Another influence on saving is a country’s unemployment rate. The chart shows the unemployment rate and household savings ratio for six countries. Unemployment rate/Household savings ratio (%)
10 8 6 4 2 0
–2 –4 –6
Australia
Finland
Canada
New Zealand
South Korea
Denmark Unemployment rate
Household savings ratio
Unemployment rate and household savings ratio for selected countries, 2016
287