Inflation and Deflation in Hong Kong in the past ten years Group1 Lau Hon Wa(Group Leader) (053034) Ng Kwun Hwa(053033) Chau Kwok On(053038) Luk Juvenia(053049) Shiu Cheuk Pan(053063)

Reasons of Inflation 1. Demand Pull Inflation 2. Cost Pull Inflation

The reasons for the inflation in HK from Structural transformation key Structural transformation key relocation of HK manufacturing activities to China relocation of HK manufacturing activities to China led to a significant increase in business opportunities for HK led to a significant increase in business opportunities for HK

The reasons for the inflation in HK from Imported inflation Imported inflation It has been argued that HK suffers from imported inflation due to the Linked Exchange Rate System. It has been argued that HK suffers from imported inflation due to the Linked Exchange Rate System.

The reasons for the inflation in HK from Housing Costs Housing Costs when there is an inflation, people forecast the housing price will be increased in the future when there is an inflation, people forecast the housing price will be increased in the future pushes up the property price and the rental price as well. pushes up the property price and the rental price as well.

The reasons for the inflation in HK from Growth in government spending Growth in government spending Government expenditure was grew in the 80s, it increased the expenditure in the public sector, thus the inflation existed. Government expenditure was grew in the 80s, it increased the expenditure in the public sector, thus the inflation existed.

Ways to curb inflation 1. To raise the interest rate 1.1  public save more money  public have less current money  purchasing power decreases  price falls 1.1  public save more money  public have less current money  purchasing power decreases  price falls 1.2  expenses when borrowing money will increase  purchasing power decreases  price falls 1.2  expenses when borrowing money will increase  purchasing power decreases  price falls

Ways to curb inflation 2. To increase the income tax  public ’ s expenses increase  their burden increases  they will spend less  quantity demanded decreases  price will decrease  public ’ s expenses increase  their burden increases  they will spend less  quantity demanded decreases  price will decrease S D1 D2 P1 P2

Ways to curb inflation 3. To decrease the sales tax  decrease the cost of goods  the supplies can set the price lower  price lower  decrease the cost of goods  the supplies can set the price lower  price lower P1 P2 D S2 S1

Ways to curb inflation 4. To issue government bonds  the current cash in the public ’ s hand will decrease  the public can buy less  quantity demanded will decrease  price falls  the current cash in the public ’ s hand will decrease  the public can buy less  quantity demanded will decrease  price falls

The factor of deflation in the world: 1. Most of the countries in the world have done many works on combating inflation and they are success. 2. Technology improves quickly 3. We can find the information about the equilibrium price of the world easier and also find more substitutes.

GDP in Hong Kong is made up of 60%C 30% I 10% G

decrease of the aggregate demand decrease of the aggregate demand inadequate money supply inadequate money supply imported deflation imported deflation Decrease in aggregate demand comprises three parts. The burst of asset bubbles The burst of asset bubbles shrink of stock market shrink of stock market labour market labour market

Imported deflation

the nominal rate of interest was at a lower level. The reduced money supply increased the real rate of interest so we have deflation. Nominal rate of interest = real rate of interest + Anticipated inflation rate

measures to combat deflation: 1. decrease the interest rate by purchasing government bonds R decrease => I increase => I increase => Y increase => Y increase

2.A well-timed tax cut increase the disposal incomes increase the disposal incomes increase in consumption

3.High government spending production of the economy would be boosted production of the economy would be boosted relieve the unemployment relieve the unemployment

4.structural reforms increasing flexibility in factor markets increasing flexibility in factor markets facilitate the reallocation of resources facilitate the reallocation of resources allow for a more rapid disposal of bad assets allow for a more rapid disposal of bad assets

5. Measures aimed at promoting deeper and more liquid capital markets.

case of Hong Kong: 1. Individual Visit Scheme 1. Individual Visit Scheme boosted retail, tourists and restaurant industries and the turnover of consumer durables and luxury goods boosted retail, tourists and restaurant industries and the turnover of consumer durables and luxury goods such as electric appliances, cosmetics, watches, gold and jewelry and etc. such as electric appliances, cosmetics, watches, gold and jewelry and etc.

2. The quick reversal of deflation to inflation in the Mainland poor harvest and grain price increase as well as the shortage of certain raw materials poor harvest and grain price increase as well as the shortage of certain raw materials Since September of 2005, the CPI of China substantially increase Since September of 2005, the CPI of China substantially increase inflation mainly driven by grain price increase in the Mainland inflation mainly driven by grain price increase in the Mainland =>price increases in certain good in Hong Kong =>price increases in certain good in Hong Kong

3. steady softening of the US dollar and resultant prices increase of the imported goods Beginning in 2001, Hong Kong dollar index has been plunging along with depreciation of the US dollar from in 2001 to 98.9 at present, dropping by 28.7% Beginning in 2001, Hong Kong dollar index has been plunging along with depreciation of the US dollar from in 2001 to 98.9 at present, dropping by 28.7% =>slowed the declining trend of Hong Kong ’ s general price level =>slowed the declining trend of Hong Kong ’ s general price level

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