-from the perspective of microeconomics
Abstract: Inflation is a common phenomenon in social and economic development, which usually means that the social purchasing power continues to be greater than the total social supply, leading to a general increase in prices. Through the observation and analysis of the consumer price index, this paper expounds the inflationary pressure that China is facing at present. By using budget constraint, Schleswig substitution effect, ordinary income effect and endowment income effect, this paper analyzes the influence of inflation on residents' consumption and different income groups, and explains the necessity of the government to take measures to regulate it.
[Keywords:] inflation; Income; consume
Inflation refers to the continuous and extensive price increase for a period of time caused by the fact that the money supply is greater than the actual money demand, that is, the actual purchasing power is greater than the social output. Its essence is that the total social demand is greater than the total social supply. Simply put, inflation refers to the continuous rise of the price level, which is a long-term concept. Therefore, a one-off rise in the price level does not belong to inflation. Inflation is an important phenomenon in the market economy. Under the current income distribution pattern in China, inflation has an important impact on the national economy and residents' lives.
First, the current inflation in China.
The official and academic circles have different views on the current inflation level in China. Officials believe that the current price increase is mainly due to hot money speculation, not structural inflation; Academics believe that China is entering the era of inflation.
At present, the indicators to measure inflation are producer price index, consumer price index and GDP deflator. This paper discusses the influence of inflation on residents' consumption, so the consumer price index CPI is adopted, which is an index to reflect the price changes of goods and services related to residents' lives and is usually used as an important reference to observe the inflation level. Therefore, this paper uses CPI index to measure the inflation level in China.
It should be noted that China's current CPI system is flawed, and this system has been questioned by scholars many times. At present, the composition of China's CPI is shown in the following table:
Table 1 Current CPI Composition in China
Specific gravity of articles
Food 34%, medical care, personal use 10%
Entertainment, education, cultural goods and services 14% clothing 9%
13% home living equipment and maintenance service 6%
Transportation 10% Alcohol, tobacco and other supplies 4%
The primary problem of China's CPI weight system is that food accounts for 34%. In the current statistical indicators, food is the most important of all eight categories of goods, which makes the fluctuation of food prices have a particularly obvious impact on CPI. Another concern of CPI is the low weight of housing. The residential category in the CPI system of the United States is 42. 1%, while that in China is only about 13%. Moreover, the so-called "residence" in China's CPI index system only refers to additional consumption such as house decoration. Excluding the value of housing as a fixed asset-the total annual consumption of urban residents' housing from 2003 to 2008 announced by the National Bureau of Statistics is only 699 yuan, 733 yuan, 808 yuan, 904 yuan, 982 yuan and 1 145 yuan, which seems to have a large annual growth (with an average annual increase of more than 5%). But in fact, because the base is too low, the growth of residential consumption is very limited anyway, which is in sharp contrast with the crazy growth of urban housing prices in China in recent years. Therefore, at present, house prices are soaring, and the CPI level can still be maintained below 10%.
Although it seems that the proportion of food and living in China's CPI system is high and low, and there is a certain degree of offset between them, in real life, the housing expenditure of Chinese residents is much higher than that of food. So the current CPI index is underestimated.
Although the current CPI index has many defects, it can still reflect the inflation level to a great extent through vertical comparison because its composition system is relatively fixed. Therefore, this paper still chooses CPI as an index to measure the level of inflation.
1996-2004, China experienced a rare deflation. Around 2004-2005, the situation changed, raw material prices began to soar, and China's price level and CPI gradually climbed. CPI in China increased by 4.8% in 2007 and 5.9% in 2008, reaching a new high since 1996. However, the subsequent global financial crisis interrupted the inflation trend in China. In 2009, the annual CPI of China decreased by 0.7% compared with the previous year.
However, the impact of the financial crisis only temporarily lowered the price of natural resources and the inflation rate in China. In 2009, as soon as the global situation stabilized, the prices of natural resources and labor continued to rise, and inflation in China accelerated again-as shown in the following figure, the changing trend of CPI index in China in the first 10 month (20 10) of this year.
Figure 1
As can be seen from the figure 1, in 20 10, China's CPI index showed an upward trend in all months except March and June. In September, CPI increased by 3.6% year-on-year, reaching a new high in 23 months, and reached 4.4% in June, the highest value in 25 months. From the data, China is facing greater inflationary pressure. Considering the defects of the current CPI index system, the current inflation rate in China should be considerable.
Second, the impact of inflation on residents' income and consumption.
Inflation is a common phenomenon in economic life. Slight inflation is normal and plays a positive role in stimulating economic development. However, when the inflation rate continues to rise, its adverse effects are also obvious.
Regarding the harm of inflation, Keynes once pointed out that nothing is easier than destroying the foundation of a society by destroying a country's currency. Inflation destroys all hidden rules in the process of economic operation, which will not only lead to serious distortion of market prices, but also lead to serious depreciation of a country's currency, thus undermining the operating rules of the whole market. Milton friedman, the Nobel laureate in economics, believes that inflation is a monetary phenomenon that has a fatal impact on the economy. If it is not stopped in time, it will destroy the whole society.
As the end of the social and economic system, people are at the forefront of directly facing inflation, and are also most directly affected by inflation. Through the application of some microeconomic theories and analytical tools, we can clearly find the negative impact of inflation.
People's purchasing power (real income level) has dropped.
When consumers buy goods, they are influenced by the price and income level. When the price of goods is fixed, the higher the income of consumers, the more goods they can buy, so the greater the utility and the better the welfare. A series of consumption bundles in which consumers spend just equal to their income level are called budget lines. On the budget line, these consumption bundles can just run out of consumers' income, that is,
p 1 * x 1+p2 * x2 = m 1
As shown by the diagonal line represented by m 1 in Figure 2:
Figure 2
The collection of all consumption bundles below the budget line is called budget set, which represents all consumption bundles that consumers can afford under the condition of fixed income and price. Obviously, when faced with inflation, commodity prices generally rise. Under the condition of constant income, the maximum quantity of goods 1 and goods 2 that consumers can buy will decrease, and the budget line will inevitably move inward.
According to microeconomics, the optimal consumption bundle of consumers is located at the tangent point of the budget line and the indifference curve. The inward shift of the budget line will inevitably mean the inward shift of the optimal consumption bundle, so the overall welfare of consumers will inevitably decrease.
The income effect and substitution effect of rising prices lead to the decline of welfare.
The above analysis is that inflation makes consumers' real income drop, so what is the impact on consumers only from the perspective of rising commodity prices?
Inflation means the rapid rise of commodity prices, so what we want to study is the response of consumers to commodity price changes when they decide the consumption quantity of commodities. Using Slacky's substitution effect and income effect, we can easily find out the change of consumers' purchase quantity when inflation (that is, price rise) occurs.
Figure 3
Suppose that under the condition of inflation, consumers buy two kinds of "comprehensive" goods, namely x 1 and x2. The former represents commodities with rising prices, while the latter represents commodities with no or limited price increases (although commodity prices generally rise during inflation, there are always some exceptions). Using Schleszky's method in microeconomics, the impact of commodity price changes (in this paper, the price increase of commodity x 1) on consumers can be divided into the process of "rotation-movement", as shown in the figure:
The first stage, that is, the process of "rotation", is the change of the slope of the budget line under the condition of constant purchasing power-the initial budget line rotates to a certain level around the initial optimal choice, and the rotated budget line has the same slope as the final budget line, so it also has the same relative price. However, due to different vertical intercepts, these two budget lines represent different monetary income. It must be noted that the initial consumption bundle represented by point A is still on the rotating budget line, so this consumption bundle is just affordable. From this perspective, the purchasing power of consumers remains unchanged before and after the budget line rotation. However, although point A is still affordable, it is not the best purchase quantity on the rotation budget line. As shown in the figure, on the rotated budget line, point B tangent to the indifference curve represents the optimal consumption. The consumption bundle B represents the optimal consumption bundle when the price of goods 1 rises, and the monetary income is adjusted to make the original consumption bundle affordable. On the horizontal axis of the graph, the movement from A to B (A-B) is called substitution effect, which refers to how consumers "replace" other commodities with one commodity when the price changes but the purchasing power remains unchanged.
The second stage is the process of "moving". The slope of the budget line remains unchanged, and the purchasing power changes, that is, it moves when the relative price of goods remains unchanged and the income changes. Compared with the rotated budget line, the consumer's optimal choice changes from B to C. On the horizontal axis of the graph, the movement from B to C (B-C) is called income effect.
Then, in the case of inflation, what changes will happen to consumers' demand? What is the sign of this change? In order to understand this problem, we must first define the concepts of normal goods and low-grade goods. Commodities whose demand increases with the increase of consumers' actual income are called normal commodities, and commodities whose demand decreases with the increase of consumers' actual income are called low-grade commodities. Under normal circumstances, the number of goods consumed by consumers will increase with the increase of income, so we assume that the goods consumed by consumers are normal goods here.
Obviously, from the above definition, when income decreases, consumers' demand for normal goods will decrease. In the environment of inflation, consumers are faced with such a situation. The rise in commodity prices leads to a relative decrease in income, which has a negative effect on income.
According to the principle of display preference and the hypothesis of optimal choice, the substitution effect is always opposite to the price change direction. Therefore, when commodity prices rise, the general direction of demand change caused by substitution effect is negative.
To sum up, on the premise that consumers consume normal commodities, if commodity prices rise, both income effect and substitution effect will change negatively with prices. That is to say, when prices rise, as long as consumers' income remains the same or the increase is less than the increase of commodity prices, the number of commodities they consume will definitely decrease, just like the consumption combination of consumers in the picture changes from A to C.
Income distribution effect of inflation
The income distribution effect of inflation refers to the income redistribution caused by the price increase caused by inflation. The income distribution effect, in the final analysis, is because consumers have different initial endowments, that is, the number of goods or assets owned by consumers before entering the market is different.
As shown in the previous analysis, regardless of endowment, although all consumers will be negatively affected by inflation (such as the previous analysis, the income effect and substitution effect brought by the decline of consumers' actual income level and the rise of commodity prices are negative), when consumers are endowed, the impact of inflation on them should be analyzed in detail. Some consumers benefit from inflation because of their own endowment, and when their benefits exceed the degree of damage, they are the beneficiaries of inflation.
Fig. 4 is a modification of fig. 3. On this diagram, the initial endowment point w is added. Because the initial donation can always be paid, point W is on the initial budget line. Point A represents the consumer's first consumption. Obviously, at point A, consumers' consumption of commodity 1 is less than their initial endowment, that is to say, consumers are actually net suppliers of commodity 1 and net buyers of commodity 2. When the commodity price 1 rises, on the horizontal axis, the movement from A to B (A-B) is called substitution effect, and the movement from B to C (B-C) is called ordinary income effect, which is consistent with the analysis in Figure 2.
Figure 4
However, because consumers have the initial endowment, and the initial endowment can be paid before or after inflation, the final budget line of consumers must pass through the initial endowment point W-because the value of the endowment owned by consumers also changes when the price changes, there is an additional income effect: the endowment income effect-that is, the movement from C to D on the horizontal axis (C-D).
At this time, it can be clearly seen from the figure that before and after inflation, consumers' consumption sets are A and D, and consumers' consumption of goods with rising prices 1 rises instead of falling, while the demand for normal goods should fall when prices rise. There is only one possible explanation for this phenomenon-due to the existence of initial endowment, consumers' income has increased during the inflation period. For this consumer, the welfare increase brought by rising prices exceeds the welfare decrease, so he is the beneficiary of inflation.
In contrast, for consumers with little or no initial endowment, the increase in welfare brought by inflation is less than the decrease in welfare, and the overall welfare declines, so he is a victim of inflation.
The above is just a simple model to illustrate the impact of inflation on consumers with different endowments. Assuming that only normal physiological needs are considered, there is little difference in the total demand of different consumers for two commodities (that is, the actual final consumption of commodities by consumers)-there is no doubt that the more endowments a consumer has, the more he can benefit from price increases.
In real social and economic life, inflation has obvious income redistribution effect. The influence of inflation on income distribution is first reflected in the fact that different social groups have different resistance to inflation, and they suffer different welfare losses in inflation. It can even be vividly said that the income redistribution effect of inflation is an effect of "robbing the poor to help the rich" (as shown in Figure 4, people with different endowments get different damages and gains during inflation): residents with different income levels have great differences in consumption-investment ratio, marginal propensity to consume, marginal propensity to invest and consumption structure, and the impact of inflation on them is very different. For high-income people (consumers with more endowments), the proportion of consumption in total income is small, the marginal propensity to consume is small, and the marginal propensity to invest is large. In addition, income and wealth provide a strong support for consumption, and inflation has little effect on it. In addition, high-income people can make up for the loss of consumption expenditure and expand their wealth through asset appreciation. For example, in the recent process of inflation and soaring asset prices, high-income people can completely offset the negative impact of inflation by buying stocks and real estate. For low-income people, due to the lack of purchasing power, consumption accounts for a large proportion of income, and the marginal propensity to consume is large. Consumer goods are mainly necessities of life (this part of consumer goods often lacks price elasticity). In addition, low-income people are often unable to resist inflation by maintaining and increasing the value of assets like high-income people. Therefore, inflation often means the rapid loss of wealth of low-income groups.
The income distribution effect of inflation can also be analyzed from the perspective of consumer income types. Consumers have their own endowments, and when they choose to provide endowments to the market, they can get benefits. Different kinds of income will be affected differently in the face of inflation: people whose main income is wages or salaries-in reality, there is always a certain interval between the occurrence of actual inflation and the time when people feel the existence of inflation, as well as the time when they demand and implement wage growth, so wage growth often lags behind price growth. The longer the wage growth lags behind, the greater the loss affected by inflation. Generally speaking, as long as there is inflation, people whose main income is wages and salaries will always suffer; Those who mainly earn interest, land rent and other rents-after inflation, there is also a time delay in the adjustment of interest and rent, which makes people who make a living from interest and rent suffer during inflation; Profit is the main income-in inflation, profit is affected by the short-term extension of monetary wage adjustment. The longer the time interval of monetary wage adjustment, the more profit growth. On the contrary, profit growth will slow down. When the monetary wage rate is consistent with the inflation rate, the profit will remain unchanged. If the enterprise adopts the pricing method of cost and profit, the profit can be unaffected by inflation. Therefore, people who take profits as their income can at least not be affected by inflation, and can get great benefits from the lag of enterprise wage adjustment, debt, rising product sales prices and other factors.
In short, the income distribution effect of inflation is as follows: the welfare of low-income people (those with less endowment) is damaged, but high-income people (those with more endowment) can benefit; Those who earn income from wages, rents and interest will suffer from inflation; And people whose main income is profit may make a profit.
conclusion
Undoubtedly, China is experiencing inflation at present, which not only brings great pressure to the economic development of China, but also has a great impact on the income and consumption of China residents, especially the interests of low-income groups are damaged, while high-income groups can benefit from inflation. If this trend continues, it will inevitably affect the stability of the whole society. Therefore, the government, which plays a supervisory and regulatory role in the development of national economy, must take measures to deal with it, and safeguard the vital interests of the general public, especially the low-income groups, while ensuring the sustained, rapid and healthy development of China's economy.
[References]
Hal varian. Microeconomics: a modern viewpoint [M]. Shanghai: Sanlian Bookstore, 2009.
[2] Yang Tianyu. Some thoughts on starting China's consumption demand [J]. Consumer Economy, 2004(5).
[3] Li Yining. Western economics [M]. Beijing: Higher Education Press, 2000.
[4] Land travel. Research on Inflation Welfare Loss in China [J]. Master's Dissertation of Shandong University, 2009(4).
[5] Zhang. On the influence of inflation on landless peasants [J]. Modern Economy, 2009(3).
[6] Li Zhiguo. Some theoretical problems about inflation [J]. Journal of Shanghai Normal University, 2004(9).
[7] orchid. A comparative study on the causes of inflation since 1980s [J]. Journal of Shanghai Administration College, 2009(3).
[8]-Fang. A Summary of Research on Inflation Uncertainty [J]. Journal of Zhongnan University of Economics and Law, 2009(2).
[9] Zhang Yuwen. Empirical analysis of income gap in China [J]. Economic Theory and Management, 20 10(8).
Tan Wei. Research on the Inequality of Income Distribution in China —— Analysis based on Lorenz Curve [J]. Scientific Research, 2007( 1).
[1 1] Zhang Genlong. Causes and Countermeasures of Current Inflation in China [J]. Special Economic Zones, 2008(7).
Huang Yanfen, Yang Xinbo. Impact of inflation and rising asset prices on China society [J]. Hebei Economy, 2008( 1).
If you think it's okay, ask again if you have any questions.