An analysis on the factors that influence Inflation
An analysis of the economy of some nations in Africa
The economy of a nation is measured by the average standard if living of its populace. The more economically stable a country is, the better or more even the standard of living of each citizen is.
There are indicators which reflect the economic conditions of a country such as: Inflation rate, Gross Domestic Product (GDP), exchange rate etc. Each of these indicators are reflective of each other that is, a country with a high inflation rate will have a very high exchange rate and vice versa.
Yemen, Somalia, South Sudan and Syria are amongst the most economically unstable countries one thing they have in common is that these four countries have recently been riddled with internal conflicts which has affected their economy. In essence, the political and social conditions in a country affect its economic stability.
Gross Domestic Produce (GDP)
This is the measure of the monetary value of all the goods and services as country produced over a period of time. It could be calculated in terms of money received by all the participants (producers, consumers and Government)in the economy or in terms of the money spent by these participant. The former method is called Measuring GDP by Income while the later is referred to as Measuring GDP as Spending.
The GDP is used in comparison with those from previous periods and it tells us if the economy is growing due to increased production or contracting due to less output. It also helps the Government to determine what the next economic plan should be; whether to inject more money into the system or to pull money out of the system.
- GDP per capita: This is a country’s economic output divided by its population. It’s a good representation of a country’s standard of living. It also describes how much citizens benefit from their country’s economy. A high GDP per capita indicates a high standard of living, a low one indicates that a country is struggling to supply its inhabitants with everything they need(statista)
The major ways of growing GDP is through increased production, more capital intensive project being done by the Government, Foreign Investments and export. Some of Africa’s greatest exports are Minerals — Gold, Copper, Tin — Agricultural produce, Clothing and Textile, and Oil and Gas.
This is the value of a country’s currency during exchange or conversion; it is usually measured against another currency. If the exchange rate is high, it means you can buy a lot of foreign currencies, goods and services with a unit of that currency. In other words, currencies with high exchange rates have strong purchasing power.
If the exchange rate depreciates, the citizens are forced to look inwards — patronize the local market rather than the foreign market which leads to increase in production. This may lead to an economic growth driven by exportation.
Inflation rate is the percentage change in the prices of commodities over a period of time. If there is a percentage decrease in the prices of commodities over a period of time, it is called a deflation.
When you can only purchase a fraction of what you used to some time ago for the same price, inflation is said to have taken place. This is an indicator that the purchasing power of that currency has fallen.
Some of the factors that can lead to inflation are
- Surge in the price of raw materials used for production. As the price required to produce one unit of goods increases, the overall cost of the finished product increases. This is especially true if the raw materials and labour used in production are imported.
- An increase in the demand for goods and services which leads to customers willingness to pay more for them.
Inflation is closely related to Interest rate which influences exchange rates. Low interest rates encourages consumer spending and economic growth, and generally positive influences on currency value. If consumer spending increases to the point where demand exceeds supply, inflation may ensue, which is not necessarily a bad outcome. But low interest rates do not commonly attract foreign investment. Higher interest rates tend to attract foreign investment, which is likely to increase the demand for a country’s currency.
I did an analysis on the economy of some African countries. The data can be accessed here. For visaulization I used Tableau, the Databoard and story can be see here.
Thirteen countries from various parts of Africa were used for this analysis.
The graphs above show the average Inflation CPI and average Exchange Rate against the Dollar for all the countries. Zimbabwe has the highest inflation rate of over 245% but its exchange rate is the 6th highest with an average rate of 20.2, Central African Republic leads the average exchange rate with a rate of 367.7.
Central African Republic has the highest average exchange rate this is due to Economic mismanagement, poor infrastructure, a limited tax base, scarce private investment, and adverse external conditions which have led to deficits in both its budget and external trade. Over the last 40 years, the capital gross national product has been in decline. (wikipedia)
Zimbabwe’s average inflation rate of 245% is known as Hyperinflation. This is due to numerous factors such as Government increasing the money in circulation in response to raising national debt, significant declines in production output and exportation, political instability and corruption leading to a weak economy (wikipedia)
The graph above shows the inflation for the various countries over the years. Zimbabwe has the highest inflation which occurred in 2008. Hyperinflation in Zimbabwe was due to currency instability that began in February 2007. The height of inflation was from 2008 to 2009. However, Zimbabwe’s peak month of inflation is estimated at 79.6 billion percent month-on-month, 89.7 sextillion percent year-on-year in mid-November 2008(wikipedia)
Egypt has the lowest inflation rate overall. The graph above shows the time line of Egypt inflation which was oscillating between inflation and deflation with its peak inflation happening in 1942.
Politics in Egypt became turbulent towards the end of World War II (1939–1945). 1945 signified the beginning of a new political era in Egypt with preliminary elections held in that year also, the British troops were removed from Egyptian soil and the Anglo-Egyptian treaty of 1936 was renegotiated.
Since 2000s, the pace of structural reforms, including fiscal, monetary policies, taxation, privatisation and new business legislations, helped Egypt move towards a more market-oriented economy and prompted increased foreign investment. The reforms and policies have strengthened macroeconomic annual growth results. As Egypt’s economy healed, other prominent issues like unemployment and poverty began to decline significantly (and still is)
The country benefits from political stability and proximity to Europe, increased exports and enjoys a strong currency. From an investor perspective, Egypt is stable and well-supported by external stakeholders.
- The political and social conditions in a country affect its economic stability as this discourages foreign investors, affects production thereby reducing export.
- Zimbabwe has the highest Inflation rate of about 245%c(Hyperinflation) due to currency instability, national debt and poor economic decisions.
- Central African Republic has the highest exchange rate due to unstable economical conditions.
- Egypt has the lowest Exchange rate and inflation showing the stability of its economy. Prior to 1942, Egypt had a very unstable economy due to the political unrest that characterized the era.
- GDP measures the total monetary value of a country; Exportation and foreign investment drives GDP.
- Inflation measures the changes in the prices of commodities over a period of time. It reflects the purchasing power of a currency. Increase in demand, change in price of raw materials and labour affect inflation.
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