Inflation in under-developed country is basically caused by
- Mass poverty
- Less production
- Lack of technical know-how
- Market imperfection
Correct Answer: Market imperfection
In underdeveloped countries, inflation is caused by market imperfections. Market imperfections occur when markets fail to function efficiently, resulting in price and resource distortions. Market imperfections that cause inflation are caused by several factors in underdeveloped countries.
An imperfect market creates an environment in which demand and supply are not balanced, causing prices to rise. In under-developed countries, these imperfections appear in numerous ways:
Underdeveloped countries often lack adequate infrastructure, such as transportation and energy supplies, which hinders their ability to produce and distribute goods. Because demand outpaces supply, these bottlenecks lead to higher prices.
Supply Chain Disruptions:
Inefficient supply chains, lacking storage facilities, and improper distribution networks can cause supply shortages. Prices rise when demand exceeds supply.
The lack of competition in certain markets allows monopolies or oligopolies to control prices. This is due to weak regulatory frameworks or entry barriers for new competitors. Monopolistic pricing power can result in higher prices for consumers.
Informal Sector Dominance:
Underdeveloped countries often have a significant informal sector which operates outside of formal regulations. As informal markets are less transparent and may not adhere to standard market forces, this can create distortions in pricing and resource allocation.
Inadequate Financial System:
An inefficient financial system can hinder investment and capital allocation. The lack of access to credit, inefficient banking systems, and underdeveloped capital markets limit productive investment, contributing to inflationary pressures and supply constraints.
The imperfections in the market in under-developed countries play a pivotal role in causing inflation. These imperfections create an environment where prices are not determined by efficient market forces, leading to price distortions and imbalances.
Why the other options are not correct
a. Mass Poverty
Inflation is not primarily caused by mass poverty, even though it is a critical issue in underdeveloped countries. When a person is poor, his or her purchasing power is limited, and the demand for goods and services is lower, which can reduce inflation. It has been explained earlier that inflation occurs when demand exceeds supply as a result of market imperfections.
b. Less Production
A lower level of production can lead to supply shortages and increased prices, but this is usually the result of market imperfections rather than a direct cause. A lack of infrastructure, inefficient supply chains, and a lack of investment are more likely to lead to a reduction in production capacity.
c. Lack of Technical Know-how:
While a lack of technical know-how can hinder economic growth and productivity, it does not cause inflation directly. Rather than a lack of technical knowledge, inflation is primarily driven by imbalances between supply and demand resulting from market imperfections.
In conclusion, market imperfections in underdeveloped countries are primarily responsible for inflation. As a result, markets are disrupted, resulting in an imbalance in demand and supply, which results in an increase in the general price of goods and services. Even though poverty, low productivity, and a lack of technical know-how are important challenges in underdeveloped countries, they are not the main cause of inflation.
The improvement of infrastructure, the enhancement of competition, the strengthening of financial systems, and the promotion of regulatory reforms can all play crucial roles in mitigating inflationary pressures and fostering sustainable economic growth.