Inflation
If deindustrialization in the UK is so advanced that the economy is not capable of producing goods to match the pattern of market demand, then there may be implications not only for imports but also for prices.
Any increase in overall demand will meet a shortage of domestic suppliers in many industrial sectors. This will both encourage import substitution and provide opportunities for domestic suppliers to raise prices. As a result, despite continuing high unemployment, there may be little effective spare capacity in the UK in sectors where deindustrialization has been excessive. Supply-side constraints created by structural change may then have increased the likelihood of the UK experiencing demand-led inflation in the event of a sustained increase in aggregate demand, such as that of the late 1980s. In response to such constraints government policy has moved towards strengthening the supply side, as with the Conservative and new Coalition government’s labour market reforms and previous Labour government measures such as the New Deal.
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More on the topic Inflation:
- CHAPTER SUMMARY
- The Problem of Inflation
- Money, Prices, and Inflation in a Two-Period Competitive Model
- THREE Combatting Inflation and Deflation
- Real GDP, Price Indexes, and Inflation
- Applying Macroeconomics to the Real World
- Macroeconomic Policy and the Phillips Curve
- Optimal Monetary Policy in the Presence of Stochastic Shocks
- The Rotemberg Model of Convex Costs of Price Adjustment
- Conclusion
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