Sep 21 2007

The true causes of and solutions to inflation in China

IB students – the following is a MUST READ article before we wrap up our unit on inflation and unemployment!

Thomas Palley’s Blog Archive: Inflation, Chinese Style

Here’s a great piece from economist Thomas Palley laying out in great clarity the underlying causes of China’s record high inflation. He explains why China’s inflation fighting strategy based on domestic contractions of the money supply are missing the point, and how to really tackle the rising prices China should look at the value of its currency.

As for why it’s in the government’s own best interest to reduce this inflation, Palley sees the issue as pretty obvious:

Putting the pieces together, the picture is one of rising Chinese inflation, and with that comes the risk of inflation-triggered social and political problems. In this regard it is worth recalling that the Tiananmen Square disturbances of May 1989 were in part caused by industrial worker unrest over erosion of living standards by inflation.

Bringing prices under control appears to be in the best interest not only of consumers in China, but of the government as well, if not for the sake of sound economic policy, then in the name of self-preservation.

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

One response so far

One Response to “The true causes of and solutions to inflation in China”

  1. Mike Fladlienon 23 Sep 2007 at 7:31 am

    the way i see it is that for china to maintain its peg, china must have high interest rates or buy the USD and supply yuans…why doesn't china let her yuan float and adjust interest rates to tame the inflation dragon? flad