4. Problems and Threats to the Development of Thai Economy

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2 4. Problems and Threats to the Development of Thai Economy 4.1 Problems and Effects of Inflation Inflation occurs when the average price of goods increases. The price of goods changes in the opposite direction of purchasing power per unit of money. In this situation, with the same amount of money, consumers will be able to buy less goods.

3 1. Causes of inflation 1.1. Caused by a fast expansion of demand: this is when demand exceeds the production capacity, leading to shortage of goods. It may be caused by: Shortage of raw materials Hoarding of goods It may also be caused by social trend (from adds or social media), which will drive consumers into a continuous increase of demand.

4 1.2. Caused by an increase in production cost: this may be caused by the increase in price of different factors of production: Labor Raw materials Electricity Profit Ratio Political crisis (sanctions, embargo, war)

5 1.3. Caused by changes in demand for certain products: this is when there is no change in collective consumption, but rather a change in taste or change in quality. For example, if demand for flat screen televisions increases: Producers will get more profit, and then They will expand production, and then They will employ more workers, And all this results in the increase of cost production.

6 1.4. Caused by international trade: To export products can cause inflation in the country. That is, if the prices of goods in other countries are higher than the domestic prices, traders will probably export more goods. As consequence, less goods will be available in the country, leading to an increase in price. When prices of imported raw materials and capital goods increase, the cost of production will increase, leading to an increase in price.

7 2. Effects of inflation 2.1. Effects on production and investment: inflation causes prices of goods to rise, which stimulates producers to expand production and use more factors of production. If so: There will be an increase in employment, leading to An increase in income, Leading to even higher levels of consumption. But, if full employment is attained, it will no longer be possible to increase labor and other factors of production. However, the prices increase fast, causing a decrease on money s buying power. Consequently, savings and investment in the country decrease.

8 2.2. Effects on income distribution: inflation causes distribution of real buying power to change. Inflation leads to unfair/unequal income distribution. Traders, businessmen, producers will profit with a growing inflation. In contrast, middle and lower classes will lose purchasing power to buy what they need.

9 2.3. Effects on the government s financial status: inflation makes the government have more revenue from collecting value added tax. As for the government expenditure, two opposed consequences are expected. More expensive goods and services bought by the government will increase government s expenditures. The same happens with the wages of public employees. In the other hand, with inflation increasing, unemployment rates decrease, so government has less unemployment allowance to pay.

10 2.4. Effects on international trade: inflation means higher prices for the goods produced in the country. If so, it will be more difficult (more expensive) to export it to other countries if competitors prices didn t change. In the other hand, with inflation in the country and, consequently, higher wages and higher purchasing power, it will be easier (cheaper) to import goods.

11 2.5. Effects on the country s politics: an increase in the prices of goods leads to an increase in cost of living. This causes a bigger income gap distribution, which may lead to labor strikes demanding higher wages.

12 3. Ways to solve inflation problems 3.1. Using monetary policy: to reduce the amount of money circulating in the country by, for instance, increasing legal reserve requirements and increasing the interest rate charged/given by the commercial banks. Government may also for cooperation from financial institutions to reduce credit to activities not good to the economy, such as loans to buy land to make profit.

13 3.2. Using fiscal policy: to reduce the demand of consumers within the country by increasing taxes on seller and buyers and others.

14 4.2 Problems and Effects of Deflation In economics, deflation is a decrease in the general price level of goods and services. 1. Causes of deflation: 1.1. Caused by the decrease in demand for goods and services: Imagine a strict monetary policy in which the government reduces the quantity of money circulating in the economic system, while the quantity of goods and services remains the same. This situation will lead to a surplus in supply, resulting in prices of goods and services decreasing continuously.

15 1.2. Caused by government s fund raising: The government may use a fund raising policy by selling bonds and treasury bills, causing a decrease in money circulating (now kept by the government). Another way government can implement fund raising is by increasing taxes (over production, consumption, etc.), so citizens will have less money to buy, which lead to a decrease in demand. If the government do nothing with the collected money, the sale of goods will definitely decrease, leading to a systematic and continuous decrease in prices (deflation).

16 1.3. Caused by recession: this is when the sale of goods and services simply decreases (economic crisis, people too poor to buy goods, etc.). Wages remain the same, but prices of other factors of production tend to reduce due to fewer sales. This causes the cost of production to decrease, and producer tend to reduce the price of goods, thus leading to deflation.

17 2. Effects of deflation 2.1. Effects on production and investment: goods and services tend to decrease. Producers reduce quantity of production and investment, which leads to an increase in unemployment. Incomes of people and profit of firms are reduced. The overall economy shrinks Effects on income distribution: it causes traders, businessmen and producers to sell goods at cheaper prices. Traders/producers will have less profit. Common people will have cheaper products (but don t forget they will probably be unemployed).

18 2.3. Effects on the government s financial status: With cheaper products comes fewer taxes collected by the government. With unemployed people, they buy less, fewer taxes collected by the government. As for the government expenditure, two opposed consequences are expected again! Cheaper goods and services bought by the government will decrease government s expenditures. In the other hand, with deflation, unemployment rates increase, so government has more unemployment allowance to pay.

19 2.4. Effects on foreign trade: when there s deflation, the prices of goods in the country decrease, thus helping to increase exports. In the other hands, foreign products will be more expensive for locals, so they will import more Effects on politics: as the price of goods and services tend to drop, producers reduce production. If so, unemployment increases, causing household incomes to decrease. In this precarious economic situation, politic situation tend to deteriorate, as less and less people will trust the government.

20 3. Ways to solve deflation problems 3.1. Using monetary policy: the government uses monetary policy to increase the amount of money circulating in the country. To achieve so, government will reduce its currency reserves and decrease central bank interest rates to persuade commercial banks to take more loans from the central bank and, consequently, people will be able to take more loans from the commercial banks (also offering lower interest rates). Then, more money will be circulating and loans will be cheaper, so more companies will be able to invest and create job, and people will be able to buy more (more jobs and cheaper credits).

21 3.2. Using financial policy: the government reduces the tax rate over products (helping decreasing prices) and increases government expenditure (for instance, in public works) to fight unemployment and to create more demand. All this will stimulate demand for goods and services and will finally ease deflation Supporting international trading: when there s deflation, the price of goods in the country decreases. This is considered a good chance for government to promote exports, which will help increase the amount of money available in the country, help reduce unemployment and, of course, increase people s income

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23 UNIT 3 ROLES OF GOVERNMENT IN DEVELOPING THE COUNTRY 4.2 Problems and Effects of Unemployment 1. Types and Causes of unemployment 1.1. Involuntary unemployment: 1.2. Hidden unemployment: 2. Effects of unemployment 2.1. Effects on utilization of laborers: 2.2. Effects on savings and investments: 2.3. Effects on income distribution: 2.4. Effects on the government s financial status: 2.5. Effects on politics of the country:

24 3. Way to solve unemployment 3.1. Using monetary policy: UNIT 3 ROLES OF GOVERNMENT IN DEVELOPING THE COUNTRY 3.2. Using financial policy: 3.3. Stimulating an export business: