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Inflation in Emerging and Advanced Countries (Chains of Reasoning)

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 30 Apr 2017

Why is the rate of inflation consistently higher for emerging market and developing economies contrasted with advanced countries? A number of demand and supply-side reasons might be given to help explain the difference. We build two chains of reasoning as an example to improve exam technique.

Inflation in Emerging and Advanced Countries (Chains of Reasoning)

Core Notes:

One reason why inflation in emerging countries tends to be higher is that many of these countries are experiencing rapid economic growth contrasted with slower growth in advanced economies.

Fast growth can lead to excess demand and a positive output gap thereby causing demand-pull inflation. It also brings about cost-push inflation for example because of rising global demand for raw materials.

A second reason why inflation in developing countries is higher is because many of these countries have volatile exchange rates and do not necessarily have a well-established central bank to operate monetary policy.     

Therefore, if a fast-growing country has a large current account deficit, this can lead to a large depreciation in their exchange rate. One effect of this is a big jump in the prices of essential imports such as foodstuffs and energy.

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