Question

Examine any three adverse or evil effects of inflation on production.

Answer 1

The evil effects of inflation are stated below.

1. Misallocation of Resources: Inflation results in maladjustments in production. Producers divert their resources from the production of essential commodities to non-essential goods (i.e., luxury goods) from which they expect higher profits.
2. Reduction in Savings: Inflation adversely affects savings. When prices rise rapidly, more money is now needed to buy the same amount of goods and services than before. Thus, saving and, hence, investment are reduced. As a result, production is adversely affected.
3. Discourages Foreign Capital: Inflation discourages the inflow of foreign capital into the country. Foreigners do not like to invest in those countries where prices are rising. Rising costs of raw materials and other inputs make foreign investment less profitable.