Imported inflation

Imported inflation is the rise in price of goods and services due to an increase in the cost of imports. This can be caused by a variety of factors, including changes in the exchange rate of a currency, increases in the cost of raw materials and commodities, or changes in tariffs and other trade barriers.

The most common way imported inflation is measured is by calculating the cost-push inflation rate, which looks at the change in price due to the cost of imported goods and services. This measurement takes into account the cost of imported goods and services, the exchange rate of the currency, and the cost of production.

There are several ways that imported inflation can have an effect on the economy. Firstly, it can reduce the purchasing power of a country’s currency as the cost of imported goods and services increases, making it more expensive for citizens to purchase goods and services. Secondly, it can lead to higher prices for domestically produced goods and services, as businesses seek to pass on the increased cost of imported inputs to their customers. Finally, it can lead to an increase in the cost of living, as individuals and businesses must pay more for the same goods and services.

In summary, imported inflation is a measure of the increase in price of goods and services due to an increase in the cost of imports, and is typically measured by calculating the cost-push inflation rate. It can have a number of negative effects on the economy, such as reducing the purchasing power of a currency, increasing the cost of domestically produced goods, and increasing the cost of living.

Example of Imported inflation

• Exchange Rate: A change in the exchange rate of a currency can cause imported inflation, as a higher exchange rate makes imports more expensive, reducing purchasing power and making domestically produced goods more expensive.
• Raw Materials: If the cost of raw materials and commodities used to produce imported goods and services increases, this can cause imported inflation, as businesses must pass on the increased cost of production to consumers.
• Tariffs and Trade Barriers: Changes in tariffs and other trade barriers can also cause imported inflation, as businesses must pay more for imported goods and services, thus increasing the cost of these goods and services to consumers.

Formula of Imported inflation

The formula of imported inflation is:

${\text{Imported Inflation}}={\frac {\text{Change in Imported Goods and Services}}{\text{Price of Imported Goods and Services}}}$

This formula is used to calculate the rate of imported inflation by taking the change in the cost of imported goods and services and dividing it by the price of the imported goods and services. The resulting number is the percentage change in the cost of imported goods and services, which is the imported inflation rate.

When to use Imported inflation

Imported inflation is most commonly used when a country is affected by external factors, such as changes in the exchange rate or increases in the cost of raw materials or commodities. It is also used to measure the effect of changes in tariffs and other trade barriers on the cost of imported goods and services. It can be used to inform economic policy decisions, such as the implementation of tariff or currency controls, or to help inform decisions about the direction of the economy.

Types of Imported inflation

• Demand-pull inflation: This type of imported inflation is caused by an increase in the demand for imported goods and services, which can be the result of an increase in the level of consumer spending, or a reduction in the cost of imports due to changes in the exchange rate.
• Cost-push inflation: This type of imported inflation is caused by an increase in the cost of imported goods and services, which can be the result of an increase in the cost of commodities or raw materials, or changes in tariffs and other trade barriers.
• Exchange rate inflation: This type of imported inflation is caused by an increase in the exchange rate of a currency. This can lead to an increase in the cost of imported goods and services, as well as an increase in the cost of domestically produced goods and services, due to the increased cost of imported inputs.

Steps of Imported inflation

• Changes in the exchange rate of a currency: When the exchange rate of a currency changes, it affects the cost of imported goods and services, which can lead to an increase in prices.
• Increases in the cost of raw materials and commodities: The cost of raw materials and commodities can increase due to a variety of factors, such as changes in global demand or supply, or changes in the cost of production. This can lead to an increase in the cost of imported goods and services.
• Changes in tariffs and other trade barriers: Changes in tariffs and other trade barriers can lead to an increase in the cost of imported goods and services, as businesses must pay more to import them.

Advantages of Imported inflation

There are several advantages of imported inflation, including:

• Stimulating domestic production: Imported inflation can encourage domestic production, as businesses may seek to replace imported goods with domestically produced goods in order to reduce costs.
• Increasing demand for exports: Imported inflation can lead to an increase in the demand for exports, as foreign countries may be more willing to buy goods from a country with higher prices due to their own inflation.
• Creating jobs: Imported inflation can lead to an increase in job creation, as businesses may need to hire more people to meet the increased demand for their goods.

Limitations of Imported inflation

Imported inflation has a number of drawbacks and limitations. Firstly, it does not take into account the effects of supply and demand, and thus may not accurately reflect changes in the cost of goods and services. Secondly, it does not account for changes in the quality of goods and services, which can have an impact on the cost of imported goods. Finally, it does not take into account the effects of taxes and other government policies, which can also have an effect on the cost of imported goods.

Other approaches related to Imported inflation

There are several other approaches to analyze imported inflation, including the following:

• The Purchasing Power Parity (PPP) approach: This approach looks at the differences in prices of goods and services between two countries, and compares them to the exchange rate between the two currencies. This helps to determine whether imported inflation is occurring due to changes in the exchange rate, or whether it is due to other factors.
• The Input-Output Model: This approach looks at the inputs and outputs of a given economy, and analyzes how changes in the cost of imported goods and services can affect the prices of domestically produced goods and services.
• The Trade Flow Approach: This approach looks at the flow of goods and services between countries and analyzes how changes in the cost of imported goods and services can affect the prices of domestically produced goods and services.

Imported inflation — recommended articles

Inflationary gap — Demand-pull inflation — Wholesale price index — Disinflation — Consumer price index — Net domestic product — Ratchet effect — Underconsumption — Income effect

References

• Nell, K. S. (2004). The structuralist theory of imported inflation: an application to South Africa. Applied Economics, 36(13), 1431-1444.