inflation and deflation in hong kong in the past ten years group1 lau hon wa(group leader) (053034)...

Inflation and Deflation in Inflation and Deflation in Hong Kong in the past ten Hong Kong in the past ten

yearsyears

Group1Group1

Lau Hon Wa(Group Leader)Lau Hon Wa(Group Leader) (053034) (053034)

Ng Kwun Hwa(053033)Ng Kwun Hwa(053033)

Chau Kwok On(053038)Chau Kwok On(053038)

Luk Juvenia(053049)Luk Juvenia(053049)

Shiu Cheuk Pan(053063)Shiu Cheuk Pan(053063)

Reasons of InflationReasons of Inflation1. Demand Pull Inflation1. Demand Pull Inflation 2. Cost Pull Inflation

The reasons for the inflation in HK The reasons for the inflation in HK from 1990-1997 from 1990-1997

Structural transformation keyStructural transformation key relocation of HK manufacturing relocation of HK manufacturing

activities to China activities to China led to a significant increase in led to a significant increase in

business opportunities for HK business opportunities for HK

The reasons for the inflation in HK The reasons for the inflation in HK from 1990-1997from 1990-1997

Imported inflationImported inflation It has been argued that HK It has been argued that HK

suffers from imported inflation suffers from imported inflation due to the Linked Exchange Rate due to the Linked Exchange Rate System.System.


Housing CostsHousing Costs when there is an inflation, people when there is an inflation, people

forecast the housing price will be forecast the housing price will be increased in the future increased in the future

pushes up the property price and the pushes up the property price and the rental price as well. rental price as well.


Growth in government spendingGrowth in government spending Government expenditure was grew in Government expenditure was grew in

the 80s, it increased the expenditure the 80s, it increased the expenditure in the public sector, thus the inflation in the public sector, thus the inflation existed.existed.

Ways to curb inflationWays to curb inflation1.1. To raise the interest rateTo raise the interest rate

1.1 1.1 public save more money public save more money public have less public have less current money current money purchasing power decreases purchasing power decreases price price fallsfalls

1.2 1.2 expenses when borrowing money will increase expenses when borrowing money will increase purchasing power decreases purchasing power decreases price falls price falls

Ways to curb inflationWays to curb inflation

2.2. To increase the income tax To increase the income tax

public’s expenses increase public’s expenses increase their burden their burden increases increases they will spend less they will spend less quantity quantity demanded decreases demanded decreases price will decrease price will decrease

S

D1

D2

P1P2


3.3. To decrease the sales tax To decrease the sales tax

decrease the cost of goods decrease the cost of goods the supplies the supplies can set the price lower can set the price lower price lower price lower

P1 P2

D

S2

S1


4.4. To issue government bondsTo issue government bonds

the current cash in the public’s hand will the current cash in the public’s hand will decrease decrease the public can buy less the public can buy less quantity quantity demanded will decrease demanded will decrease price falls price falls

The factor of deflation in the The factor of deflation in the world:world:

1.1. Most of the countries in the Most of the countries in the world have done many works world have done many works on combating inflation and on combating inflation and they are success. they are success.

2.2. Technology improves quicklyTechnology improves quickly

3.3. We can find the information We can find the information about the equilibrium price of about the equilibrium price of the world easier and also find the world easier and also find more substitutes. more substitutes.

GDP in Hong Kong is made up of GDP in Hong Kong is made up of 60%C 30% I 10% G60%C 30% I 10% G

-20

-10

0

10

20

1996 1997 1998 1999 2000 2001

year

%

private consumption domestic capital formation

government consumption

decrease of the aggregate demanddecrease of the aggregate demand inadequate money supply inadequate money supply imported deflationimported deflation

Decrease in aggregate demand comprises three parts. Decrease in aggregate demand comprises three parts. The burst of asset bubblesThe burst of asset bubbles shrink of stock market shrink of stock market labour marketlabour market

Imported deflationImported deflation

import goods price level index

85

90

95

100

105

110

1997 1998 1999 2000 2001 2002year

2000

=100

(bas

e ye

ar)

import goods price level index

the nominal rate of interest was at a lower the nominal rate of interest was at a lower level. The reduced money supply increalevel. The reduced money supply increased the real rate of interest so we have sed the real rate of interest so we have deflation.deflation.

Nominal rate of interest = real rate of interest + AnticipatNominal rate of interest = real rate of interest + Anticipated inflation rateed inflation rate

measures to combat deflation: measures to combat deflation:

1.1. decrease the interest rate by decrease the interest rate by purchasing government bonds purchasing government bonds

R decreaseR decrease => I increase => I increase => Y increase=> Y increase

2.A well-timed tax cut 2.A well-timed tax cut

increase the disposal incomesincrease the disposal incomesincrease in consumption increase in consumption

3.High government spending 3.High government spending

production of the economy would be production of the economy would be boosted boosted

relieve the unemployment relieve the unemployment

4.structural reforms 4.structural reforms

increasing flexibility in factor increasing flexibility in factor markets markets

facilitate the reallocation of facilitate the reallocation of resources resources

allow for a more rapid disposal of bad allow for a more rapid disposal of bad assets assets

5. Measures aimed at 5. Measures aimed at promoting deeper and more promoting deeper and more

liquid capital markets.liquid capital markets.

case of Hong Kong: case of Hong Kong:

1. Individual Visit Scheme 1. Individual Visit Scheme boosted retail, tourists and boosted retail, tourists and

restaurant industries and the restaurant industries and the turnover of consumer durables and turnover of consumer durables and luxury goods luxury goods

such as electric appliances, such as electric appliances, cosmetics, watches, gold and jewelry cosmetics, watches, gold and jewelry and etc. and etc.

2. The quick reversal of deflation to 2. The quick reversal of deflation to inflation in the Mainland inflation in the Mainland

poor harvest and grain price increase poor harvest and grain price increase as well as the shortage of certain raw as well as the shortage of certain raw materials materials

Since September of 2005, the CPI of Since September of 2005, the CPI of China substantially increase China substantially increase

inflation mainly driven by grain price inflation mainly driven by grain price increase in the Mainland increase in the Mainland

=>price increases in certain good in =>price increases in certain good in Hong Kong Hong Kong

3. steady softening of the US dollar 3. steady softening of the US dollar and resultant prices increase of the and resultant prices increase of the

imported goods imported goods

Beginning in 2001, Hong Kong dollar Beginning in 2001, Hong Kong dollar index has been plunging along with index has been plunging along with depreciation of the US dollar from depreciation of the US dollar from 138.9 in 2001 to 98.9 at present, 138.9 in 2001 to 98.9 at present, dropping by 28.7% dropping by 28.7%

=>slowed the declining trend of =>slowed the declining trend of Hong Kong’s general price level Hong Kong’s general price level

Composite Consumer Price Index

92.9

98.8

104.5 107.5

103.2

99.4 97.8

94.8 92.4 92.0 93.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year(s)

CPI


Composite CPI yearly change percentage

-6.0

-4.0

-2.0

0.0

+2.0

+4.0

+6.0

+8.0

+10.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year(s)

Gro

th ra

te


Change in Inflation rate VS change inGDP at constant market prices (2000)

-8-6-4-202468

1012

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year(s)

Groth

rate

Inflation groth rateGDP groth rate

Change in inflation rate VS change inumemployment groth rate

-6

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year(s)

Gro

th ra

te

Inflation groth rate

umemployment groth rate

Change in inflation rate VS change inthe best lending rate

-6

-4

-2

0

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year(s)

Gro

th ra

te

Inflation rates

the best lending rate

THE ENDTHE END

inflation and deflation in hong kong in the past ten years group1 lau hon wa(group leader) (053034)...

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