|INSTRUCTOR DISCUSSION NOTES:
China’s Inflation on the Rise Again
1. Why do you think a lack of infrastructure such as ports, railroads, and highways can influence inflation?
Part of the inflationary scare in 2004 was caused by a lack of infrastructure. Without sufficient rail, trucking, and ports shortages are caused in the country as products are not able to move fast enough to meet consumer demand. If ships have to wait for a month or more just to unload their cargo shortages are caused in all areas of the economy. For producers, the shortages result in increased production costs. Producers pass on some of these costs in the form of higher prices. If railroads are unable to transfer the cargo on their docks to trucks which take products to a final destination the result is once again shortages and higher prices. Any bottle neck that appears in the system can contribute to higher prices. This is why China quickly placed much effort into rebuilding and improving ports, railroads, and highways after the crisis in 2004.
2. Use any source available to comment on the success of price controls to combat inflation.
Price controls are a part of what economist call incomes policy. Although intended to improve the inflationary tendency of an economy, they are more of a band-aid then a cure for inflation. Price controls actually distort market processes and can themselves cause shortages. Wikipedia offers a good explanation at http://en.wikipedia.org/wiki/Price_controls.
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