Irish Economy in Recent Years

INTRODUCTION

This is assignment two for applied economics. Applied economics is part of the level 5 fecta certificate in business studies. This assignment will analyse the different sources and effects of inflation on an open economy.

The assignment will focus on the Irish economy in recent years. It will investigate the effects that inflation and deflation has caused on the economy and the causes that influence inflation and deflation. It will also discuss what can be done to curb inflation.

Currently in Ireland it is experiencing inflation. Deflation is the decrease in the general price of goods and services. Deflation is caused when the inflation rate falls below 0%. It was announces by Ireland central statistics office in February 2009 that it had experienced deflation of 0.1% in price during January 2009 compared to January 2008. This was the first time since the 1960’s that the Irish economy experienced this.

CAUSE OF INFLATION

DEMAND PULL

There are many causes of inflation. These causes will increase the general level of prices.

The first cause that will be discussed is demand roll inflation.

Demand roll inflation takes place when the demand of goods and services is greater than the current amount available at its current price. This greater demand is dissatisfied at the current price and the extra demand will cause the price to increase. This type of inflation was seen in Ireland during the Celtic tiger as it generally occurs in times of full employment. It caused house prices in Ireland to increase dramatically. This caused the price of new houses surged by 200% from 1997 to 2007.

COST PUSH INFLATION

Another cause of inflation is cost push inflation. This occurs when the cost of inflation increases without any increase of productivity which causes the price of goods to increase. This can occur in two ways.

The first is an increase in wages. When wages increase, the price of the goods must be increased as the producer’s...