Inflation In The South African Economy Economics Essay

Inflation is one on the most of import characteristics of the South African economic system. Basically, if monetary value degrees are non kept within control, a whole economic system can be destabilized. That ‘s why most authoritiess favor a low-steady rate of rising prices. In May 2010, a work stoppage led by two trade brotherhoods of Transnet over hapless on the job conditions led to a sudden addition in rewards which was good above the rising prices rate of 5.1 % . Transnet being South Africa ‘s largest cargo concatenation that delivers goods all around the state stopped most of the activities due to absence of workers. This work stoppage had some effects on the economic system which shall be explained utilizing the AS-AD model to demo that the addition in rewards and the impact of the work stoppage will decidedly take to an addition in general monetary value degrees.

The initial impact of the work stoppage was a loss of production because workers stopped all activities throughout the state. Transport services were non running during the work stoppage period and as Transnet is ‘the largest and most important portion of the cargo logistics concatenation that delivers goods to each and every South African ‘ ( Transnet, 2010 ) ; coal exports, transportation and fuel distribution all over the state were affected. The chief challenge that the South African taking crude oil companies had to face was the distribution of the fuel. Besides, the activities of the refineries and terminals of crude oil merchandises had been stopped due to the absence of workers to drive the trucks. ‘If prolonged, the work stoppage will make constrictions in the industry, with refineries likely to see an glut of crude oil merchandises. Tshifularo said SA ‘s refineries, which are in Durban, Cape Town and Sasolburg, could be forced to scale down their production. ‘ ( Njobeni, 24 May 2010 ) hypertext transfer protocol: //allafrica.com/stories/201005240034.html. Since aggregative supply is dependent on measure of labor, the consequence of the work stoppage caused the Short Run Aggregate Supply curve ( SRAS ) to switch to the left. A lessening in figure of workers agencies that production degrees decreases therefore houses have to increase their end product costs.

While Transnet agreed on a pay rise of 11 % , the workers were demanding a 15 % pay addition which is good above the current rising prices rate of 5.1 % . An addition in rewards for the workers would intend an addition in passing power. That would certainly let them to hold a more comfy life but in bends, the company has to supply for this new disbursal. This extra cost has to either be absorbed by the company itself or be passed on to consumers in the signifier of higher monetary values in footings of end product goods and services. General monetary value degrees will be raised if input monetary values have been raised, houses will cut back production to their ain benefit and this will do the aggregative supply curve to switch to the left indicating for a given monetary value degree, a lower measure will be allocated. This phenomenon is called cost-push rising prices. ‘Cost-push rising prices develops because the higher cost of production factors decreases in aggregative supply ( the sum of entire production ) in the economic system. Because there are fewer goods being produced ( supply weakens ) and demand for these goods remains consistent, the monetary values of finished goods addition ( rising prices ) . ‘ hypertext transfer protocol: //www.investopedia.com/terms/c/costpushinflation.asp. Cost-push rising prices can be shown utilizing the AS-AD model. In this instance the aggregative demand does non alter ; it is the aggregative supply curve that shifts to the left, as in the diagram below.

Degree centigrades: UsersRohanDesktopc_push.gif

The aggregative supply in an economic system is the entire supply of concluding goods and services in a given clip. In other words the AS refers to the GDP of an economic system in a given clip period. Here, the leftward displacement of the AS curve causes the macroeconomic equilibrium to switch therefore increasing the general monetary value degrees and diminishing GDP.

The trade brotherhoods responsible for demanding the pay addition argued for yearss with Transnet before the latter had to revise their offer. It can be clearly seen that the trade brotherhoods have a batch of power in their custodies but are they utilizing mistreating that power? Trade brotherhoods are administrations that look after worker ‘s right and guarantee that employees stick to the jurisprudence or respectful on the job conditions. Throughout the work stoppage, there was a lessening in productiveness for houses as the workers could non make their work topographic points or at least acquire at that place on clip. Increase in rewards is really of import as if the family ‘s income remains changeless and the monetary value degrees increase so the worker ‘s buying power will decidedly diminish. This is a wage-price spiral – general monetary value rises will take to higher pay demands as workers will ever seek to keep a existent and appropriate criterion of life. Firms will hold to increase their unit labor costs because of higher rewards being paid over any additions in productiveness. So for the houses to maintain a nice net income border, they will hold to increase the monetary values of their concluding goods. This procedure could reiterate itself over and once more and do rising prices.