The term hyperinflation is almost an understatement when it comes to describing the level of inflation in Zimbabwe. In July 2008, inflation was estimated to be 231 million per cent. In January 2009, two estimates were made: one of 5 sextillion per cent (5 and 21 zeros); the other of 6.5 quindecillion novemdecillion per cent (65 and 107 zeros). These figures are simply mind-boggling for most people living in low-inflation economies.
Commentators say that prices can double in a single day and this can render banknotes useless very quickly. In fact, local banknotes are scarcely used as people turn to overseas currencies that offer more stability. Recognising this, in late January 2009 the government officially allowed foreign currencies to be used in Zimbabwe as well as the Zimbabwe dollar.
In an attempt to stabilise the currency the Zimbabwean central bank on more than one occasion has tried dropping several zeros from the currency. But this has had little effect and in January 2009 a new series of banknotes was issued, including a Z$100 trillion note. This is unlikely to be the last issue though, but what comes after a trillion?
Zimbabwe rolls out Z$100tr note BBC News Online (16/1/09)
ZIMBABWE: Inflation at 6.5 quindecillion novemdecillion percent IRIN News (United Nations) (21/1/09)
Questions
- Define the term hyperinflation.
- Analyse the main causes of hyperinflation.
- Discuss policies that the Zimbabwean government could adopt to try to reduce the level of inflation in the economy.
- Assess the impact of hyperinflation on the other major macro-economic targets.
- Research another instance of hyperinflation and write a brief summary of the cause(s) and the solution(s). You may find the Wikipedia entry on hyperinflation a good starting point.
Given all the attention that the recession has had for months in the media, it may be surprising to find out that in fact Britain only went into recession officially today (January 23rd 2009). This is because, as economists, we have a more precise definition of recession than much of the media. A recession is when there is two successive quarters of negative economic growth. Figures released by the ONS today, show that this is finally the case. The links below give a flavour of the media attention dedicated to this announcement.
Recession Britain: It’s official Guardian (23/1/09)
Countdown to recession Guardian (23/1/09)
No end to the melodrama Guardian (22/1/09)
Recession: we knew it was coming, but we didn’t know it would be this bad Times Online (24/1/09)
Recession: Sector-by-sector breakdown Times Online (23/1/09)
It’s official – Britain is in recession Times Online (23/1/09)
UK in recession as economy slides BBC News Online (23/1/09)
Recession figures heighten the gloom Independent (23/1/09)
UK recession: It’s official and the worst since 1980 Telegraph (23/1/09)
UK recession: How does this one compare to those since 1945 Telegraph (23/1/09)
UK recession: It’s now official Telegraph (23/1/09)
Questions
- Explain the principal reasons why the UK has fallen into recession.
- Discuss the extent to which the UK recession is likely to be worse than in other countries in Europe.
- Analyse whether the policies adopted by the UK government will reduce the length and depth of the UK recession.
- Evaluate two further policies that the governmnt could adopt to reduce the depth of the recession.
- Assess which sectors of the economy are likely to suffer (a) the most and (b) the least, as a result of the recession.
While deflation was quite common right up to World War II, it has not been seen in the UK since 1947. The podcast considers whether it might return and looks at the impact of deflation on economic activity. There is a short case study on the deflationary years suffered by Japan between 1997 and 2006 and a consideration of policies that might be appropriate to overcome defaltionary pressures.
Governments and central banks around the world are trying hard to minimise the impact of the economic downturn on their economies. One means of doing this is to cut interest rates. The aim is to boost aggregate demand by giving people more disposable income and making borrowing and investment cheaper. But how responsive will people be to the interest rate cuts? The articles and podcasts below look at the issues.
Combating the recession The Economist (8/1/09)
Economic downturn: ‘Interest rates may not be such a useful tool any more’ Guardian (9/1/09) Podcast
Beyond rate cuts Financial Times (15/1/09)
Beyond retail therapy Guardian (8/1/09)
Uncharted territory for interest rates BBC News Online (8/1/09)
Latest cut in interest rates will not revive flagging economy Times Online (9/1/09)
Interest rates – the setting of the LIBOR rate BBC Biz Daily (9/1/09) Podcast – Tim Harford
Questions
- Explain the process by which lower interest rates boost aggregate demand.
- Explain what is meant by the LIBOR rate. Listening to the BBC Biz Daily podcast above may help in answering this.
- Assess the importance of the LIBOR rate in determining the levels of borrowing and investment in the economy.
- Discuss the relative effectiveness of fiscal and monetary policy in boosting the level of aggregate demand in the UK economy.
The World Economic Forum has warned that 2009 may see a ‘hard landing’ for China. In the context of China, this does not necessarily mean a recession, but the WEF report does identify a significant possible slowdown in Chinese growth. Given that high growth in China has led to a high level of demand for imports from other countries, especailly for raw materials and semi-finished goods, any slowdown in Chinese economic growth may have significant repercussions in the rest of the world. Any hopes that China and the emerging economies may help the rest of the world through their recessions have been dashed by data showing that even exports from China have been falling in October and November 2008 by 2.2% and 2.8% respectively. This has meant that aggregate demand in China is falling and may cause further problems, not only for China, but for the whole world economy.
China slowdown ‘big global risk’ BBC News Online (13/1/09)
China’s exports in record decline BBC News Online (13/1/09)
China’s exports slump in sharpest decline in decade Times Online (13/1/09)
World Economic Forum highlights Chinese slump as biggest risk to global economy Telegraph (14/1/09)
Chinese exports fall by the biggest margin in a decade Telegraph (14/1/09)
Questions
- Explain the significance of the fall in Chinese exports for the Chinese economy.
- Analyse the principal causes of the fall in the level of Chinese exports.
- Assess how the changes in China’s trade position will affect the exchange rate of the Chinese currency, the yuan.
- Discuss policies that the Chinese government can implement to try to minimise the impact of the fall in exports on economic growth.
