INTRODUCTION

On our previous lesson on topic five (5) we have learnt about inflation which is the general
increase in the level of price in an economy over time. We have also learnt about the three types
of inflation which are; Cost-Push Inflation, Demand-pull Inflation and Imported-Inflation.
Topic 6: Effects Of Inflation
 Sub-topic: Effects Of inflation on Production and Distribution
Learning Objectives: At the end of the lesson, students will be able to:
 List the effects of inflation on production and distribution
 Define key terms involved in inflation on the production and distribution.
 Explain the effects of inflation on the production and distribution.

Content Background
Inflation refers to the general increase in prices of goods and services over time. It affects various
aspects of the economy, including production and distribution. Understanding how inflation
impacts production is crucial for businesses, policymakers, and economists.
 Effects of inflation on production.
Inflation impacts production in various ways, influencing both the costs and the overall economic
environment in which producers operate. Here are some key effects;
1. Decrease in the value of money/ Depreciation

Depreciation is when a currency experiences a decrease in value when it is compared to other

2. Decrease in foreign investments

Foreign investors invest funds mainly to earn profits. They generally prefer stable economies to
safeguard their investments. Thus this situation of inflation in a economy may finally lead to
investors shying away from parking their funds in a country. This in turn leads to decrease in
production levels.

3. Decrease in domestic investments

Inflation takes a toll on savings of people in an economy. This invariably reduces the capital
accumulation, finally resulting in reduced investment from the domestic front.

4. Business uncertainties.

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Business uncertainties may arise due to certain conditions. For example, unexpected rising cost,
increase in competition from other companies, change in policy by the government, or suppliers
going bust. Capital accumulation declines on the count of business uncertainties. It discourages
entrepreneurs and businessmen from taking business risks in production.p

Scenario: The Impact of Inflation on Production in Country X

Impact of Inflation on Production in Country X

Background: Inflation in Country X 2% - 4% but has risen from 2% to 8%.

Key Effects:

1. Currency Depreciation:

- Impact: Higher costs for imported materials, reduced consumer spending.

- Result: Less investment in new technologies and expansion.

2. Reduced Foreign Investments:

- Impact: Drop in foreign direct investment (FDI).

- Result: Fewer new projects, slower production growth.

3. Reduced Domestic Investments:

- Impact: Eroded savings, less capital for investments.

- Result: Stagnation in production levels.

4. Business Uncertainties:

- Impact: Rising costs, unpredictable policies.

- **Result**: Reluctance to invest, decline in innovation.

Inflation has increased costs, reduced investments, and created uncertainties, challenging the
economy. Collaboration is needed to stabilize the situation.

 Effects of Inflation on Distribution

A. Increased Transportation Costs:

Inflation often leads to higher fuel prices, which directly increase transportation costs. This
affects the entire distribution network, from the movement of raw materials to the delivery of
finished products. For example, A company that distributes goods across a country may face
higher costs for fuel, leading to increased shipping charges. For instance, if fuel prices rise by

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10%, the cost of transporting goods from warehouses to retail stores also increases, which can
result in higher prices for consumers

B. Higher Inventory Costs:

Inflation can increase the cost of holding inventory. As prices rise, the value of goods in storage
also increases, leading to higher insurance and storage costs.

Example: A retailer that stocks large quantities of products may find that the cost of maintaining
inventory rises with inflation. For example, if the price of electronics increases due to inflation,
the retailer will need to spend more on insurance and storage for these higher-value items2.

These examples illustrate how inflation can impact the distribution process, leading to increased
costs that can affect both businesses and consumers. Would you like to explore more effects or
discuss strategies to mitigate these impacts?

STUDENT’S ACTIVITIES:

1:List 1 effect of inflation on production and 1 effect on distribution.

2. Define these following terms.

What is the definition of “depreciation”?

How would you define “foreign investment”?

3. Can you explain what “business uncertainties” are?

3. True or false questions.

3.a.Domestic investments is talking about someone in PNG investment in BSP PNG.

True

False

3.b.Foreign investment means investing money in domestic businesses rather than overseas.

True

False

Summary

 Decrease in Value of Money is also called depreciation

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  Entrepreneurs and business owners are less likely to take risks, affecting production
efficiency.
 Effects of inflation on distribution can increase transportation and inventory costs.

Home work.

List some effects of inflation on consumption?

Answer sheet.

1. List the two effects of inflation on production and distribution.

- Decrease in the value of money/ Depreciation

2. A. What is the definition of “depreciation”?

Depreciation refers to the gradual reduction in the value of an asset over time, often due to wear
and tear or obsolescence.

.B How would you define “foreign investment”?

Foreign investment is the capital that investors from one country invest in assets or businesses in
another country, often to gain a return or to expand operations.

3. Can you explain what “business uncertainties” are?

Business uncertainties are unforeseen events or factors that might impact a company’s operations,
profits, or overall market conditions, such as economic recession or political instability.

4. True or false questions.

3.a.Domestic investments is talking about someone in PNG investing in BSP PNG.

True

False

3.b Foreign investment means investing money in domestic businesses rather than overseas.

True

False