Defining Inflation Economics Essay


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Defining Inflation 
Inflation and outlook

Inflation refers to a quantitative measure of the increasing rate of price level of goods and services in an economy over a given period. The three types of inflation include demand-pull, cost-push, and built-ininflation. The primary determinant of inflation is the consumer price index. The consumer price index is composed of three main components which are: housing and utilities (19%), food and non-alcoholic beverages (26.2%), and the transport with a percentage of 12.7%. The other components include clothing and footwear (7.4%), household equipment and maintenance (5.9%), health (5.8%), and miscellaneous goods and services of 5.6%. The remaining 17.3% is occupied by communication, alcoholic beverages and tobacco, restaurants and hotels, education and recreation, and culture.

The annual inflation of Tunisia stood at 6.7% in October 2019, which was its highest level since October 2018. In 2019, a decrease in the prices was realized in food and non-alcoholic beverages (4.9% vs. 6.5%), furnishings (7.7% vs. 8.3%), housing, and utilities (4.2% vs. 4.7%), and recreational andculture (3.6% vs. 4.5%). On the other hand, inflation hiked mostly for education (6.9% vs 5.4%), clothing and footwear (8/8% vs 7.2%), restaurants and hotels (13.8% vs 9.4%), health (9.3% vs 8.4%) and transport (3.5% vs 2.1%). The report given by the central bank of Tunisia showed that inflation remained constant for alcoholic beverages and tobacco at (27.6%). The consumer price index increased by 0.5% monthly during the year 2019.

The diagram below shows the inflation rate in the year 2019.

State of economy and outlook

Tunisia experienced economic growth at the end of 2018 that picked upwards to 2.5 percent from 2 percent as per the report in 2017. The above statement was supported by the agricultural sector, services that included tourism that witnessed a significant rebound, electrical and mechanical industries. However, in 2019, a report released on the status of the economic growth showed that the country experienced a weak growth rate of 1.1 percent during its first half of year 2019. The weak growth was stimulated by a slowdown in agricultural extension and contraction in the industry. The real GDP growth slowed to 1.5% in 2019 due to two years rebound. The agricultural growth and the finishing sectors slumped from 9.8% in 2018 to 1.7% in 2019.

The fiscal deficit increased slightly to 3.9% in 2019. The current account deficit was estimated to 10% of GDP in 2019, and this was projected to stay till 2020. The unemployment rate in 2019 found to be 15.3%. The percentage represented a slight drop as the decline in unemployment among graduates continued. An employment rate among people aged 15 to 24 were found to be 34.3%. The poverty rate also increased to 30%. The increased poverty rate was caused by increased costs of living as per the center of economic and social research. The research showed that the North-Ouest region is the most affected, with a poverty rate of 28.4%. The social climate and the impending investment and growth are destabilized by continuing inequalities. Reducing the disparities implies accelerating the structural reforms that were initiated in the previous years. The acceleration would be done by the introduction of specific measures aimed at more inclusive growth. Its also recommended that public spending needs to be prioritized and better targeting to spearhead the economy.

Money supply and credit extension

Money supply refers to the total amount of money that exists in a country, or that is in circulation in a given state. Credit extension refers to the permit granted to the lender extending the date of loan payment. In June 2019, the central bank of Tunisia reported a slight increase in the money in circulation (+7.5%) as compared to the supply in May 2019 (+6.6%). The trend attributed to the rise in the contribution of net claims on the state of +1.5% vs. +0.9% in the previous month. In regards to the monetary resources, the central bank of Tunisia stated that a sharp acceleration was realized in June 2019. The acceleration was caused by an increase in bank deposits (4.2% in June vs. 0.3% in May) and term deposits (3.7% in June vs. 2.7% in May). The report showed that there were lower credits to the economy. The loan to the economy was reported to have suffered from the tightening monetary policy and hence led to a downward trend in June 2019 (5.8% YoYvs. 6.8% in May and 11.4% in June 2018), majorly concerning the deceleration of loans to individuals and loans to professionals. The liquidity needs of the central bank of Tunisia averagely decreased by 585 MD in July 2019 in comparison with the previous month’s record of 15,024 MD. The central banks’ volume of intervention continued to decline in July 2019 and reached 11.787 MD from 11.999MD in June 2019. The above trend mainly affected foreign exchange swap transactions, which amounted to 1,067 MD in July 2019 as against the previous monthly record of 1,209 MD and 2,428 MD in December 2018. Besides, banks’ recourse to the 24-hour permanent loan facility decreased by 371MD. lastly, the weighted average rate of the primary refinancing operations and the MMR stood at 7.75% and 7.83% respectively

Exchange rate and balance of payments

The exchange rate refers to the value of one currency in terms of another. Therefore, the exchange rate of Tunisian currency is the value of the 1Tunisian dollar in terms of US dollars. The graph below shows the 2019 exchange rate in Tunisia.

There was a decrease in the rate of exchange in June 2019, where 1USD equals 2.98605 TND as compare to the exchange rate in January that was 1USD equals 3.00 TND. A further decrease in the exchange rate was realized in October and December 2019, where 1USD was equivalent to 2.85941TND and 2.79043 TND, respectively. The reduction in the exchange rate in the year 2019 indicated a growth in the Tunisian economy.

Balance of payment refers to the record of all economic transactions that take place between residents of a given country and other foreign countries in a given period. Tunisia’s balance of payment data was reported at 1,042.500 TND Mn in December 2019. The record indicated a decrease from the previous number of 5,009.500 TND Mn in September 2019. The balance of payment in Tunisia is usually updated quarterly, averaging 100.200 TND Mn from January 2004 to December 2019, with a total of 65 observations September 2019, the data reached an all-time high of 5,009.500 TND. They recorded a low of -2,184.600 in July 2011. Tunisia’s balance of payment data remains active in CEIC and is reported by the central bank of Tunisia.

Changes in relevant international interest rates

In Tunisia, decisions based on interest rates are taken by the executive board of the central bank of Tunisia. The bank’s official rate of interest becomes the tender call rate. The average interest rate has been 4.96% from 2006 till 2029. However, in February 2019, the interest reached its highest of 7.75%. The diagram below shows the interest rate from the previous years till 2020.

Analyzing the diagram above, the interest rate during the year 2019 increased up to 7.75% and then remained constant in the other months. There were no changes made to the interest rate, not including the international rates. The main reason as to why there were no changes is because the country’s operation was normalized. If changes are made to the global interest rates, it could lead to either reduction or increase in the investment.

Content (worth a maximum of 50% of the total points) Zero points:  Student failed to submit the final paper. 20 points out of 50:  The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50:  The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately.  Elements of the required response may also be lacking. 40 points out of 50:  The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples.  The answer is complete. 50 points:  The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples.  No aspects of the required answer are missing.
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